How do changes in tax rates impact DCF evaluations?

Changes in tax rates significantly impact discounted cash flow (DCF) evaluations primarily by affecting net income and free cash flow. When tax rates increase, a company's net income typically decreases, as a larger portion of its earnings is paid out in taxes. This reduction in net income subsequently impacts calculations of free cash flow, which is derived from operating cash flow after accounting for capital expenditures, and is crucial for a DCF analysis.

Free cash flow is often expressed as net income adjusted for non-cash expenses, changes in working capital, and capital expenditures. Therefore, any decrease in net income due to higher tax rates can lead to a lower free cash flow figure, directly influencing the company's valuation in a DCF model. Conversely, a decrease in tax rates would likely boost net income and free cash flow, leading to a higher valuation.

While there may be other factors influencing a DCF evaluation, the direct relationship between changes in tax rates and net income/free cash flow establishes the importance of considering tax implications in financial modeling and analysis.