Valuation methods: include tax debt and interest payment or not?
August 28, 2021
by a searcher from University of Virginia-Darden - Darden School of Business in Charlottesville, VA, USA
I'm working on a a valuation and got to thinking when I value the company should I include yearly tax, interest, and principle payments (ie count them as a cost) like you would when using and Equity Residual Approach?
To put it another way instead of just discounting the EBITDAs for the forecasted period and the terminal value using our required rate of rate of return should I really be using net income after taxes (NOPAT) or free cash flows where the EBITDA is reduce by the yearly debt payment (principle + interest)
from The University of Chicago in Chicago, IL, USA
2) Value does depend on buyer's capital structure, interest, taxes, etc.
3) You should NEVER discount EBITDA. Discounting can ONLY be applied to cash flow.
4) You seem to know valuation math. So here are few comments. WACC assumes constant capital structure, which is never true. Hence, one cannot use FCFF b/c it uses WACC should not be used. That leaves us with FCFE. But that is a challenge b/c how do you know FCFE w/o knowing debt-service, which requires knowing price, which is what we are trying to determine. This is a circular problem. It can be solved through iterations. You can find my articles on Google, SSRN and BVR.
from The University of Chicago in Chicago, IL, USA