Does a Tax cut affect EV/EBITDA multiple?
Hello,
In the past, I was asked if a company got a tax cut from 25% to 0%, what would the new multiple be? Going up? Going down? Stay the same?
I thought it would stay the same but then they gave me a scenario of EBITDA $500, D&A $0 and Interest Expense is $100.
They also mentioned that the Net Present Value increases so the multiple would change.
I suspected they were hinting about the implied EV from DCF but I am not sure.
What are your thought?
If taxes go to zero, the company will generate more cash flow. That cash flow can be used to pay down debt, issue a dividend, fund future M&A, etc. EBITDA won't change but valuation will increase based on higher expected future cash flows so multiple should go up.
Often think of TEV including the PV of the tax benefits of depreciation and amortization. Those items have value due to the tax shield so if the rate decreases the PV of the shield decreases which in turn decreases the TEV so multiple would go up.
Apologies for being dense here - if TEV goes down (with you there), why would EV/EBITDA multiple increase?
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