I’m just thinking some potential investments will go from below the hurdle rate or close to it, to exceeding the hurdle rate, since after-tax cash flows will be higher, since taxes will be lower.
It’s easy to say that an investment that will be profitable at a 21% tax rate will also be profitable at a 35% tax rate, but that’s not always the case on a project by project basis, and definitely not the case when projected cash flows are discounted for risk.
I’d rather tax the money when it actually flows to the wealthy shareholders and execs. Republicans obviously won’t do that, but a future Dem administration could do that while keeping the corporate rate at 21%.
Been some years since my basic finance, but IRC. It’s not exactly that simple for a few reasons that basically. All revolve around the idea that changing the tax rate will also change the hurdle rate for a few reasons:
- all other things being equal, lower taxes will push the fed to raise interest rates because of inflation, thus raising the expected interest rate on bonds => raising the cost of debt
- typically interest is tax deductible, so lowering the tax rate will make the cost of debt somewhat higher even for the same interest rate
- cost of equity will also tend to increase because expectations of stock prices increase.
- overall this will increase WACC
- I expect the biggest factor will be that the tax cuts slice both ways, in that continuing operations also becomes more profitable than it was before, so the opportunity cost of pursuing some project vs investing the money into building more of the same dildos is also higher.
I expect overall, you are still correct, but it might not be that simple if hurdle rate goes from %10 to 12% for a company.
Of course, a lot (most probably ) companies are not well run in this way and might not be smart enough to actually recalc their hurdle rates.
I suspect that the companies this helps the most are those medium-sized companies that are large but not enormous and have almost all of their operations domestically. The “I’m not big enough to make an Irish double cream pie with a twist sandwich tax evasion scheme” but I still have a 100 million+ in revenue.
