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Assuming no new investment opportunities, we demonstrate the conservation of aggregate value among the three financial stakeholders. Government, through collection of taxes, joins equityholders and debtholders as recipients of the firm's net operating income. We extend Modigliani and Miller's capital structure models by adding government as the third major financial stakeholder.

Ignoring these adjustments runs the risk of undervaluing the equity of Estonian companies, as well as the equity of companies operating under similar tax regimes. The results suggest that conventional valuation models and their inputs should be adjusted when valuing Estonian companies.

The equity value under DPT is also higher when financial leverage is considered. To illustrate this, we use a dividend discount model and values from a hypothetical company. We show that fundamental equity value under a DPT system should be higher vis-à-vis equity value under a TPT system ( ceteris paribus ). A TPT system is a system where the amount of corporate income tax is determined by the profit the company earned during the taxation period. This theoretical paper compares the relationship between a company’s equity value and taxation of profits under traditional (or classical) ( TPT ) and DPT systems. Under the Estonian system of corporate taxation, companies need not pay income tax on undistributed earnings, allowing them to postpone income tax liability indeterminately. A gap exists in research into the implications of the distributed profit taxation ( DPT ) system in Estonia for corporate value creation. The equity valuation of hypothetical companies revealed highly diverse estimates and an unawareness of the positive aspects of distributed profit taxation vis-a-vis traditional profit taxation on a company's value.Ĭorporate value creation and management are one of the key issues for any business enterprise. However, many respondents did not make any adjustments when valuing Estonian companies, but proceeded from the same grounds when valuing Estonian and non-Estonian businesses. Analysts adjust models primarily when calculating the cost of capital and forecasting corporate income tax liability.

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Results show that free cash flow to the firm and EV/EBITDA multiples are the most popular valuation models among analysts, with the majority of analysts using these models together.

The survey also included hypothetical valuation cases seeking to determine the difference in analysts' views on equity value in a simplified framework. As distributed profit taxation allows Estonian companies to postpone their income tax liability, it should lead to a positive impact on the value of Estonian companies compared to non-Estonian ones. We elucidate whether and how practitioners treat certain aspects of corporate income taxation when valuing Estonian companies, and how they adjust conventional models taking into account the peculiarities of the Estonian distributed profit taxation system. The main purpose of this study is to clarify the valuation practices of Estonian analysts with emphasis on fundamental analysis-based valuation methods. In this paper we present the results of a survey of Estonian valuation practitioners. This is the first empirical study related to the linkage between distributed profit taxation and company valuation.

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