Hi all,
I have an interesting quesiton for you.
When valuing an asset, lets say IP etc. You can use a DCF valuation correct.
Then after doing so, do you gross up for tax purposes?
Because lets the asset cost 50 and the value is now 100. all on after tax dcf valuations.
Then the gain is 50. But if tax is 10% that means the seller will only receive 45? What about his missing 5 since it was valued at 50 after tax?
Does he not need to ask for 50 grossed up to 50/.9 (55.56), so then after tax he received 50 for that asset??
I'm actually not even sure what you're asking.
Yes, you can use a DCF to value any asset (for better or for worse)
As a general rule, if you're dealing with after-tax cash flows, your gain (i.e., the difference between the selling price and the inside basis) will already be tax-effected.
Similarly, if you're dealing with pre-tax cash flows, then you'll have to tax-effect the gain to get the appropriate number.
You can use this same logic to back into the appropriate cash flow format depending on if you have an after-tax or pre-tax gain to start with.
I'm not even sure if this answeres your question, but whatever.
unfortunately no it doesnt.
Im talking about looking at the value from the asset/companys seller perspective.
The buyer will do a DCF analysis right and value the asset at lets say 100.
Then he will pay 100 for it. Lets also just say to make it easier the sellers cost base is 0, and tax is 25%. Then the seller will only get 75 for this asset after tax, even though he wants 100 for it. Should not the buyer pay 133 for the asset, that way after tax of 25% it leaves the seller with 100??
Yes, if your cost basis is $0 and you desire $100 after-tax proceeds from the sale of the asset, you will require a minimum selling price of $100/(1 - 0.25) = $133.3
Just keep in mind that you only get taxed on the GAIN on sale of assets, so, for example, if the inside basis was $100 and you sold the asset for $133.3, your total AFTER-TAX proceeds would be $108.3 = (Net Proceeds - ((Book Value - Net Proceeds) * Tax Rate))
Using this formula, you can simply back into the required net proceeds (or any other variable) depending on your desired after-tax proceeds, inside basis, and tax rate
But does a DCf valuation take this into perspective.
A seller may do one and it values the company at such and such. but does it take into acocunt that tax that will need to be paid on the gain?
Well it depends on who's doing the DCF. If you desire specific after-tax cash flows, then yes, you will take into account all associated cash outflows (such as taxes) in your projections.
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