In a DCF model, what happens to cash flows when tax rates are lowered?

In a DCF (Discounted Cash Flow) model, a reduction in tax rates directly impacts cash flows by increasing them. This occurs because lower tax rates result in decreased tax liabilities for the business. As a company pays less in taxes, it retains a larger portion of its revenue, thus enhancing the overall cash flow available.

When tax liabilities decrease, the after-tax profit increases, which leads to higher net cash flows. This is a crucial aspect of financial modeling as it allows for more accurate projections of a company’s future cash flows, leading to a potentially higher valuation in a DCF analysis.

Other options might suggest that cash flows decrease due to increased expenses or remain unchanged; however, these scenarios do not accurately reflect the relationship between tax rates and cash flows. Similarly, while revenue growth is important, it does not solely determine cash flows, as expenses and taxation also play significant roles.