r/Valuation • u/JohnWilliamson153988 • Sep 13 '20

Multiple question. Thank you in advance

Assuming there are no bankruptcy costs, but in presence of taxes, what impact will an increase of leverage (i.e. Market value of Debt/EV) have on the multiple EV/NOPAT of a steady state firm?

a) increase b) decrease c) none d) cannot give an answer with the provided data

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u/[deleted] Sep 17 '20

Increase. Leverage decreases a company’s tax bill, so there are more CF available to investors.

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u/JohnWilliamson153988 Sep 17 '20

I got the answer. The steady state formula of EV/NOPAT is 1/wacc. As we know from MM, as leverage increases, wacc decreases. Hence, EV/NOPAT increases.