Name 3 ways lowering the corporate tax rate affects a DCF. What's the net effect?

Question

IBPrep · Accepted Answer

(1) Lower cash taxes → higher UFCF → higher EV (positive); (2) Smaller debt tax shield → effective cost of debt rises → WACC rises → lower EV (negative); (3) Cost of equity rises slightly (Hamada effect: higher levered beta with a lower tax rate) → WACC rises → lower EV (negative). The net effect is ambiguous, it depends on leverage and the size of the rate change.

Name 3 ways lowering the corporate tax rate affects a DCF. What's the net effect?

Answer

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