How does changing the tax rate affect the multiples a company is trading at?
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Use your brain rather than asking people to do your homework. What are the items used to compute a multiple?
for a multiple like EV/EBITDA, EBITDA is unaffected. However, I’m a bit confused on how EV would change based on the tax rate since EV is just equity value + debt - cash + pref stock + minority interest
a different tax rate would only affect a valuation if you're using a P/E multiple or a UFCF multiple given that those are the only two formulas that include the tax rate
I think you meant LFCF*
Let's take two extreme examples - a company with a 0% tax rate and one with a 99% tax rate. Now thinking about P/E and EV/EBITDA in both cases...which company would investors pay a higher multiple on earnings or EBITDA for? Which will ultimately give higher cashflows to investors? Which would investors pay less for?
Is no one considering the impact to MEV that would decrease TEV due to lower net earnings > lower earnings per share and in theory, that should lower price per share? So higher taxes does not affect the operational metric but on the TEV side wouldn't it eat away at equity investor earnings, making market equity less valuable and decreasing the overall TEV multiple?
Pretty sure this is the right answer for enterprise value multiples, but what would happen to equity multiples where your earnings account for the tax rate change? I guess stay the same assuming markets are perfect?
Simply less distributable earnings including potential adverse affects to dividends if applicable. More tax means less earnings. Remember, even calc'ing unlevered fcf for EV requires first EBIT*(1-TR) so you're lowering NOPAT off the bat
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:
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.
lol, if your goal is to come across as a tool with a low EQ, this is the right approach. You're technically answering the question literally in your response, but this completely misses the point of what the interviewer is actually asking
Where did he say that what he wrote was what OP should respond with in an interview? He said “should ask for further clarification” and “these are other potential things to consider”. My read was he was laying out the various potential alternatives depending on what information is provided
Bonehead MBA associate 😂😂 dur dur I read in 400 biws tax go up earnings go down so multiple go up 😂😂😂
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
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