Which tax rate is preferred when calculating FCF?

When calculating Free Cash Flow (FCF), the effective tax rate is preferred because it accurately reflects the taxes a company pays on its actual income after taking into account various deductions, credits, and other adjustments. The effective tax rate considers all tax liabilities and expenses, providing a more realistic figure that represents the true cash outflow for taxes incurred by the company.

Using the effective tax rate helps ensure that FCF calculations provide a clearer picture of the company's cash-generating ability. This is important for investors and analysts as it allows for better comparisons between companies and industries. While the statutory tax rate indicates the legally imposed rate, it does not account for the actual taxes paid, which can vary significantly due to numerous factors. The cash tax rate reflects what is actually paid in cash terms during a period but can be influenced by various accounting practices and timing issues.

Considering all of these factors, the effective tax rate stands out as the most suitable option for calculating FCF, as it aligns with real-world cash flows that the business experiences.