Tax Rate Reduction Effect On DCF

This question tests whether candidates understand that DCF valuation is driven by both projected cash flows and the discount rate. A tax change affects operating cash flow through after-tax earnings, but it also changes the financing side of the model by reducing the value of the interest tax shield and affecting the cost of capital inputs. Interviewers like this topic because it checks whether you can think through the full model, not just one line item, and understand how valuation assumptions interact.

In an interview, you should be able to explain the direction of each effect, how taxes flow through free cash flow and WACC, and why the net impact depends on the company’s capital structure and fundamentals. The goal is to show disciplined valuation logic and an understanding of how a change in one assumption can move multiple parts of an intrinsic valuation model.