How does changing the tax rate affect the multiples a company is trading at?

StreetofBulls

The right approach is to ask for more clarification before answering. The mechanical impact of a change in tax rate is well covered above (in absence of additional information), but don't see that as being representative of what actually plays out in the real world. A few other elements to consider:

• What's the time period of the tax-affected metric (LTM or forward)? When does the change in tax rate kick in? These will all have implications on whether the event will impact a company's multiple 
•  Is the change in tax rate guided to the market in advance (i.e. broad change in policy from government)? If the case, you'd expected to see immediate multiple compression as public market investors are quicker to price in events, versus brokers adjusting their EPS / FCF forecasts (i.e. if looking at consensus forward multiples). However, this normalizes fairly quickly. When the actual impact materializes, the multiple will have already priced / factored this in (both from investors and brokers).
• If the tax rate change is specific to the company and a "surprise" to the market, a few potential outcomes:
  • Multiple compression expected to occur immediately post announcement - this is generally moreso due to market psychology as investors haven't had the opportunity to fully digest the financial impact of the new tax rate, so knee-jerk reaction is to sell
  • Multiple stays constant - i.e. market prices in perfectly the revision to equity value vis-a-vis financial impact on the company's earnings
  • Multiple goes up - Most unlikely outcome from my perspective. Potential explanation is public investors have a less pessimistic view on impact vs. brokers   

Note that the points above assumes that tax rates go up (worse for equity investors), and forward consensus estimates. The overarching point is ignoring the impact on equity value and focusing only on earnings / FCF effectively means you're ignoring half the equation, and IMO that doesn't prove to me that the interviewee truly understands the concept at its core.

If you gave this answer in an interview I would immediately ding you

If you tell me this at work I would immediately request to not having to work with you again