Forensics Institute: Tax Reform s Effect on Valuations. May 16, 2018

Transcription

1 Forensics Institute: Tax Reform s Effect on Valuations May 16, 2018 TO RECEIVE CPE CREDIT Individuals Participate in entire webinar Answer polls when they are provided Groups Group leader is the person who registered & logged on to the webinar Answer polls when they are provided Complete group attendance form Group leader sign bottom of form Submit group attendance form to training@bkd.com within 24 hours of webinar If all eligibility requirements are met, each participant will be ed their CPE certificate within 15 business days of webinar 1

2 Our Presenter Rand Gambrell, CPA, ABV, CFE, CFF, CVA Forensics & Valuation Services Taxes & Business Valuation... Our Two Favorite Subjects! BANG HEAD HERE 2

3 Before We Get Started... A Brief Refresher on Valuation What Drives Value? Fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell & both having reasonable knowledge of relevant facts 3

4 How Do We Estimate Value? Valuation Approaches Asset Approach Income Approach Market Approach In Other Words... The valuation formula is: Benefit Stream Rate of Return = Value 4

5 Tax Reform: Key Change #1 Income Range Old Rates New Rate $1 to $50,000 15% 21% $50,001 to $75,000 25% 21% $75,001 to $10,000,000 34% 21% Over $10,000,000 35% 21% Tax Reform: Key Change #1 Impact of Tax Rate Change Before TCJA After TCJA Federal Corporate Rate 35.0% 21.0% State Corporate Rate 6.0% 6.0% Federal Tax Deduction -2.1% -1.3% Adjusted State Rate 3.9% 4.7% Combined Tax Rate (Rounded) 39.0% 26.0% 5

6 Tax Reform: Key Change #1 Impact to Cost of Capital Before TCJA After TCJA Equity Rate 20.0% 20.0% Debt Rate 6.0% 6.0% Tax Deduction (39% % 26%) -2.3% -1.6% After-Tax Debt Rate 3.7% 4.4% Equity Weighting 65.0% 70.0% Debt Weighting 35.0% 30.0% Cost of Capital ("WACC") 14.3% 15.3% Long-Term Growth Rate 3.0% 3.0% WACC Capitalization Rate (Rounded) 11.0% 12.0% Tax Reform: Key Change #1 6

7 Practical Impact of Tax Cuts and Jobs Act (TCJA) Reduced taxes due to lower tax rates What does management do with the tax savings? Growth rates impacted? Limitations on interest deductions Capital expensing Impact to Cost of Capital Impact to Cost of Capital Before TCJA After TCJA Equity Rate 20.0% 20.0% Debt Rate 6.0% 6.0% Tax Deduction (39% % 26%) -2.3% -1.6% After-Tax Debt Rate 3.7% 4.4% Equity Weighting 65.0% 70.0% Debt Weighting 35.0% 30.0% Cost of Capital ("WACC") 14.3% 15.3% Long-Term Growth Rate 3.0% 3.0% WACC Capitalization Rate (Rounded) 11.0% 12.0% 7

8 Impact to Capital Structure & Cost of Debt TCJA s Impact on Capital Structure & Cost of Capital Interest no longer fully deductible (in certain situations) Incentive to use more equity funding (generally more expensive than debt) Companies with strong balance sheets may use cash & tax savings to pay down debt balances Resulting changes to cost of capital will likely be modest 8

9 Bonus Depreciation Changes Immediate deduction at declining percentages 100% through % in % in % in % in % after 2026 Must consider impact after 2023 Bonus Depreciation Example Company starts operations in 2014 Annual CapEx of $100,000 50% bonus depreciation in prior years Five-year straight-line depreciation for remainder 9

10 Bonus Depreciation Example Bonus Depreciation Example Summary If bonus depreciation is not considered Single-period capitalization (Depreciation = CapEx) understates total value Multiperiod discounted cash flow valuation overstates value if negative future impact isn t considered 10

11 Other TCJA Considerations Does pass-through entity premium (PTE) still exist? Market transaction-based methods impacted? Impact on net operating loss carryforwards QUESTIONS? 11

12 CONTINUING PROFESSIONAL EDUCATION (CPE) CREDIT BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered. CPE CREDIT CPE credit may be awarded upon verification of participant attendance For questions, concerns or comments regarding CPE credit, please the BKD Learning & Development Department at training@bkd.com 12

13 THANK YOU For more information Rand Gambrell, CPA, ABV, CFE, CFF, CVA 13