As the taxrate is increased, all enterprise value multiples
decrease,butthedifferencebetweenthepretaxmultiplesEV/
EBITDAandEV/EBITandtheafter-taxmultipleEV/EBIT(1
−t)increasesasthetaxrateincreases.Forexample,ifthetax
rateis 20 percent,theEV/EBITDAmultipleis11.52whereas
theEV/EBIT(1−t)multipleis17.29.Ata 40 percenttaxrate,
theEV/EBITDAdropsto7.04,lessthanhalftheEV/EBIT(1
−t)of14.09.Putanotherway,pretaxmultipleswilldecrease
disproportionatelymorethanafter-taxmultiplesastaxrates
increase.
What are the consequences for relative valuation? When
comparing companies with widely divergent tax rates, a
failure to control for tax rate differences will result in
high-tax-ratefirms lookingcheaponan EV/EBITDA basis
relativeto firmswith lowtaxrates.This isascenario that
many European analysts have faced when comparing
companiesinthesamesectorthatareoperatingindifferent
countries.Germancompaniesshouldtradeatlowermultiples
ofEBITDAthanIrishcompanies;theGermantaxrateisin
excessof 38 percent,whereastheIrishcorporatetaxrateis 12
percent.Evenwithinthesamemarket,companiesmayface
differenteffectivetaxrates,largelyasaconsequenceofnet
operating loss (NOL) carryforwards and tax planning. We
wouldexpectfirmswithlargeNOLs(andthuslowereffective
tax rates) to trade at higher multiples of EBITDA or EBIT.