How does the tax adjustment work in IDW S1?
A core Valuation interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Both numerator and denominator are adjusted: Cash flows: Net distributions after Abgeltungsteuer (25% + 5.5% Soli = 26.375%). Discount rate: CAPM components adjusted: Rf_net = Rf x (1–personal tax rate), same for MRP and the overall CAPM result. This ensures consistency – you're comparing after-personal-tax cash flows with an after-personal-tax discount rate.
WHAT INTERVIEWERS LISTEN FOR
- ✓Adjust numerator and denominator
- ✓Net distributions after Abgeltungsteuer
- ✓CAPM components adjusted for personal tax
- ✓Consistency between cash flows and discount rate
COMMON MISTAKES
- ✗Only adjusting numerator or denominator
- ✗Using pre-tax discount rate with after-tax cash flows
- ✗Ignoring solidarity surcharge (Soli)
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