Question

Hello,

I have to value a company as of September 2008. The company reported that it went through a big restructuring in 2008 in its half-year report. I have read in your book that I should neglect this in forecasting my earnings if I assume this is a one time issue. However, it certainly does have an effect on 2008s actual cashflows (at least through tax effects). And I want to forecast the cashflows for the last quarter of 2008 also. So how do I deal with this? I can hardly neglect that the firm probably does not have to pay taxes for 2008 and that it can probably carry losses forward for a

Answer 1

If the only effect is that you will be able to pay less taxes in the future, why not just ignore it while you do the valuation and add the tax benefit from the restructuring charge separately?

Answer 2

Thank you. For clarification, do you mean I should basically use an APV method? My plan was to use the WACC. Can I do it like this?

Value of Company = Value without restructuring using WACC + tax benefit of restructuring

We were always told not to mix both methods.

Or the way I would prefer it: let cashflows be the same as without restructuring and just adjust the WACC for the first three periods by lowering the tax rate.

Answer 3

Thank you. For clarification, do you mean I should basically use an APV method? My plan was to use the WACC. Can I do it like this?

Value of Company = Value without restructuring using WACC + tax benefit of restructuring

We were always told not to mix both methods.

Or the way I would prefer it: let cashflows be the same as without restructuring and just adjust the WACC for the first three periods by lowering the tax rate.