Accounting for taxes in your valuation

by a searcher from The University of Chicago - Booth School of Business

4 years ago

Traditional CAPM driven valuation accounts for taxes at the corporate level but does not consider the personal taxes of the investor.  For instance, the CAPM discount rate and free cash flow calculations used to calculate intrinsic value account for the 21% corporate tax rate but do not account for individual capital gains taxes or dividend taxes.  When valuing flow-through entities like LLCs or partnerships, how are you accounting for taxes?  Just using the corporate tax rate for comparability? Are you adjusting the tax rate down from the corporate level to account for some benefit of the flow-through?  Using zero as a tax rate because the flow-through entity doesn’t pay taxes?  Interested in what others are doing as well as any published approaches (academic or from practitioners).

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3 comments

lender from University of Missouri - Columbia

from a lending perspective we traditionally use 27% of EBITDA. This was the number a couple of different CPAs gave us to use. There isn't a magic number since each state has different tax rates and taxable income will vary based on the depreciation and/or amortization deduction available. So in a broad stroke we deduct 27% on EBITDA to accommodate the tax liability independent of the entity structure. Even if there is a pass through via being an S Corp money will still need to flow out of the business in the form of a distribution to cover taxes

4 years ago | like reply | 2 likes

searcher

I'm taking the same approach (40% taxes). Interested to hear if there are other approaches to this.

4 years ago | like reply | 0 likes

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