Deferred Taxes and Provisions

What is the correct way to account for deferred taxes and provisions in a DCF?

Should I just leave the deferred taxes as they are and assume that future taxes will offset each other and have no impact on aggregate cash flows?

Or should I subtract the increase in deferred taxes and only use cash taxes?

If I do leave deferred taxes in, do I have to do anything with the deferred tax liability account? (I'm assuming no since I will be taking them into account in the FCFs)

Lastly, how do you usually treat other provisions in your valuations (operating and non-operating)?

Thank you all for your help

Comments (12)

Jul 26, 2009

only use cash taxes
exclude non-operating - should be starting with EBITDA anyway, so not sure how you'd have non-operating items included to begin

Jul 27, 2009

Thanks. I need the value of non-operating assets to get to total firm value (value of operating assets + value of non-operating assets).

If I take out the deferred taxes, should I subtract the value of the deferred liability (as a debt equivalent) from the firm value when I calculate the equity value?

Thanks for the help.

Jul 27, 2009

Some people start with Net Income, in which case it'd be something like this -

Net Income
adjusted for Net Interest (after tax) =
Unlevered Net Income
adjusted for Change in Deferred Taxes=
NOPAT

Then regular adjustments for depreciation, CAPEX etc.

Jul 27, 2009

I have to ask who are you doing this for? Banking or Buyout shop?

The way it would be done for each actually differs...

Jul 27, 2009

I'm doing this for banking...

Jul 27, 2009

Maybe a better way to ask this, is:

If I only use cash taxes, do I still have to subtract deferred tax liabilities from EV to get to my Equity Value?

Jul 27, 2009

cash taxes take the deferral into account, that's why is cash vs. book taxes because of deferrals...

If its a bank then use the deferred taxes as it will warp up the EV while a PE firm would exclude them as it would assume transaction assumptions and to obtain a conservative EV, they would be excluded... The model would definetley have the deferred taxes built but they just wouldn't use it in the DCF valuation...

Jul 27, 2009

Sorry for being slow with this, but I thought that if there is a deferred tax liability account, the company will eventually be required to pay more taxes in the future.

If this is the case, don't I have to subtract it from TEV to get to Equity Value since the account is essentially an obligation for future payment?

Jul 27, 2009

You are right - you have to subtract DTL from TEV because it is a future liability. For DCF purposes assume that the dollar amount stays the same for the projected period. If your senior banker wants it differently they should give you guidance

Jul 28, 2009

So just to make sure one last time:

I should add-in (take-out) any decrease (increase) in deferred taxes to only reflect cash taxes, correct?

Should I then ALSO subtract (add) any deferred tax liability (deferred tax asset) account from my TEV to get to Equity Value?

Should I just use the book value for this?

Thanks for your help

Mar 23, 2010

Say your working in ER, using the sec financials, would i assume that the DTA and DTL stay same throughout the projected periods?

Oct 5, 2010
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