How Does Tax Rate affect EPS and P/E Ratio
I have done some practice interviews and have been thinking about one question I was asked.
I believe the question was:
What would be the new stock price of a company if the tax rate decreases from 50% to 25%. Currently has $2 EPS and 15x P/E multiple.
I'm thinking you would you back out earnings to know the pretax income of $4, adjust for new tax rate (25%) = $3 EPS. Assuming the P/E multiple is the same, new stock price would be $45. Someone said since tax rate is being cut in half you could simply double the earnings to $4 EPS and with the same P/E multiple the stock price would be $60 but that's not making sense to me.
Appreciate you taking the time to read and help out.
I agree with your logic here. With $2 EPS and a 50% tax rate, pre tax income is $4 per share. If that’s taxed at 25% you end with $3 EPS. At 15x multiple that’s $45.
^checks out.
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