A company has a P/E ratio of 20 and an EV/EBITDA multiple of 12. The company has no debt and no cash. What is the effective tax rate embedded in these multiples?
An advanced Valuation question — expect it in final rounds and case-heavy interviews (IB, PE, Big-4 Transaction Services).
THE SHORT ANSWER
For a no-debt, no-cash company, EV = Equity Value. P/E = Price / EPS, EV/EBITDA = EV / EBITDA. EPS = Net Income / Shares, EBITDA = EBIT + D&A. Assuming D&A = 0 for simplicity, EBIT = Net Income / (1 - t). So EV/EBITDA = (P * Shares) / (EBIT) = (P * Shares) / (Net Income / (1 - t)) = P/E * (1 - t). Given P/E=20, EV/EBITDA=12, then 12 = 20 * (1 - t) => 1 - t = 0.6 => t = 40%. So the implied tax rate is 40%.
WHAT INTERVIEWERS LISTEN FOR
- ✓No debt/cash: EV = Equity Value
- ✓EV/EBITDA = P/E * (1 - tax rate) if no D&A
- ✓Solve: 12 = 20 * (1 - t) => t = 40%
COMMON MISTAKES
- ✗Assuming D&A = 0 without stating assumption
- ✗Forgetting that EV/EBITDA uses enterprise value
Reading isn't the same as answering under pressure.
Interviewers don't hand you the model answer — you deliver yours on a clock. Practice this and 1,000+ questions with AI feedback on every answer.
RELATED QUESTIONS
- Which valuation method typically gives the highest value?
- How do you determine the appropriate peer group?
- Why do we use EBITDA as a proxy in valuation?
- Why is the median preferred over the mean for multiples?
- How do you handle different fiscal year-ends in a comps analysis?
- How do you adjust EBITDA for a comp analysis?