hard · Private Equity & LBOs
An LBO model shows year-1 EBITDA of $120M, cash interest of $55M, D&A of $30M, and a cash tax rate of 25%. The model also amortizes $8M of capitalized financing fees and $12M of acquisition-accounting intangible step-up, both of which are non-deductible for cash-tax purposes in this jurisdiction. A junior analyst computes cash taxes as 25% × (EBITDA − D&A − cash interest − fee amortization − intangible amortization).
By how much does this misstate the year-1 cash tax, and in which direction?
- It understates cash taxes by $5M, because the $8M fee and $12M intangible amortization ($20M total) are non-deductible and must be added back to the tax base, raising taxable income by $20M and tax by 25% × $20M = $5M
- It overstates cash taxes by $5M, because non-deductible amortization shields income and the analyst failed to subtract it twice
- It understates cash taxes by $2M, because only the $8M financing-fee amortization is non-deductible while the intangible step-up remains deductible
- It is correct, because all book amortization reduces taxable income regardless of jurisdiction-specific deductibility rules
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