Taxes and tax rates are important to understand when you do DCF valuation. Taxes and tax rates impact your net income, cash flows, capital structure, cost of capital, and therefore valuation. Tax rates are applied to operating profits before taxes in your DCF model. But what happens if you do not have any operating profits!?
What tax rate would you use if your company currently has operating losses.
If your company has losses, you will not be paying any taxes. In fact, you will likely be gaining a tax benefit in the form of carry-forward of losses providing you a tax shield in the future.
If your company has losses in the current operating period, you will likely forecast losses in the next few years. Therefore, you must carry forward these losses to set off against future earnings under the tax rules appropriate to your company. As your company begins earning income, you can apply the tax slab rates according to the appropriate tax rules. As the earnings increase, the effective tax rates get closer to the marginal tax rates.