Question

How does the tax rate affect the current share price?

So a company expects to have 28 million in free cash flow.

The growth rate of free cash flow is expected to be 14% the following year, 12% the year after that and continue to decline by 2% until it reaches 6% where it will remain indefinitely. There is no debt and there is 6 million shares outstanding and the investor requires a 15% return on the company stock. The tax rate is 40%. What is the current share price?

I got 33.18. But I am wondering if it is correct to calculate the net present values after tax. Should tax affect the current share price?

Answer 1

TV: Terminal Value

Note: Tax will not have any impact on the FCFF, as it has already been captured in the computation of FCFF.. Also, interest on debt is a tax deductible expense. Since there is no debt in the company, there is no tax shield available on interest to the company.