Module II· EV-Equity BridgeIntermediate

Question

How do you tax-effect debt-like items such as pension or litigation reserves?

Answer

Logic

Debt-like items become tax-deductible on unwind (pension payout, litigation settlement). The tax shield reduces the effective liability value. Method: gross liability × (1 − marginal tax rate).

Deep diveShow more details

Example

Pension underfunding $100m, t = 30% − after-tax value $70m. Litigation reserves $50m, t = 30% − after-tax $35m.

Application

Deduct only the after-tax values from EV. Exceptions: items that are not tax-deductible (e.g. EU antitrust fines are often non-deductible) − deduct gross.

Pitch tip

'Pension underfunding $100m gross / $70m after-tax − applied to the EV-Equity bridge as a $70m deduction, reflecting the tax shield on settlement.'

← PreviousHow do you treat restricted stock units (RSUs) in the bridge?Next →What is the difference between operating cash and excess cash, and how do you treat each?

Back to Valuation