Tax Act Effect on Valuation

By Jeff Faust, CVA, Director of Valuation Services
ASL Business Valuation Services

With the signing of the Tax Cuts and Jobs Act (TCJA) in December 2017, valuation analysts have been tasked with incorporating the changes to the tax law into their analysis. Changes, such as the lowering of corporate tax rates and restrictions on interest deductibility, must be factored into valuation analysis to capture the effects of the TCJA on company value. When valuing a US company, valuation analysts must now consider the following:

  • Lower corporate tax rates will increase company value, holding all other factors equal
  • The effective tax rate is key, not the marginal rate
  • The effect of varying state income tax rates and state adoption of the TCJA
  • The increase to the after-tax cost of debt given the lower tax rates
  • Higher equity returns and a higher Weighted Average Cost of Capital (WACC)
  • New restrictions on interest deductibility impact the cost of debt, equity and the WACC and may change a company’s preference for debt vs. equity
  • Markets may become more price competitive leading to a decline in revenues
  • Bonus depreciation’s effect on normalized depreciation
  • The sun-setting of certain tax provisions

Overall, the changes brought on by the Tax Cuts and Jobs Act should have a positive impact on a company’s value but the ultimate outcome greatly depends on the facts and circumstances within each company.  For example, companies that are growing and investing internally without increased borrowing should see increases in value due to the tax changes, whereas companies that are investing internally through increased borrowing may not see the benefits.  Valuation analysts must be aware of each company’s unique facts and circumstances to determine the effect of the TCJA on a company’s valuation.

If you would like to discuss your company’s value and the potential effects of the TCJA, please contact Jeff Faust, CVA, Director of Valuation Services at jfaust@aslcpa.com or 408-377-8700 x232.

 

Source: http://quickreadbuzz.com/2018/07/11/the-impact-of-the-tax-cuts-and-jobs-act/