Chart 10: Sector EPS impact from border Chart 11: Sector EPS impact from border Chart 12: Sector EPS impact from border adjustment tax (15% rate) adjustment tax (20% rate) adjustment tax (25% rate) Staples -23% Staples -31% Staples -36% Discretionary -21% Discretionary -28% Eiscrtsnay aS Energy 8% Energy -10% Energy “13% Health Care 4% Health Care -O% HealthCare 6% Info Tech 3% Info Tech 4% Into Lesh 3% Utilities 0% Utilities 0% tilts 0% Telecom 0% Telecom 0% Telecom 0% Financials 0% Financials 0% Financials 0% Real Estate 0% Real Estate 0% Real Estate 0% Industrials 1% Industrials 1% Industrials 2% Materials 3% Materials 4% Materials 5% -30% 20% -10% 0% = 10% 40% -30% -20% -10% 0% += 10% -50% -40% -30% -20% -10% 0% 10% m 15% tax rate 20% tax rate 25% tax rate Source: BofAML US Equity & Quant Strategy, FactSet, S&P Source: BofAML US Equity & Quant Strategy, FactSet, S&P Source: BofAML US Equity & Quant Strategy, FactSet, S&P Offsetting BAT with a little math and some price increases A company could fully offset the border adjustment tax by raising prices such that the after-tax increase in sales would exceed the drag from the lost deduction of costs. All else equal, the break-even price increase would be equivalent to the cost of goods sold as a % of sales multiplied by net % imported and the tax to after-tax ratio, which at a 20% rate is 0.25 (20%/80%). ; ; tax rate (%) BAT price of fset = COGS (% of sales) * net import (%) * (ite sete ORD) As an example, a company with a 25% gross margin that imports 30% of its goods would need to increase its prices by of 5-6% to offset the border adjustment tax, all else equal. Offsetting BAT with FX Some of the increase in the after-tax cost of imported goods can also be offset by a strengthening dollar. For example, companies producing goods in Mexico, which stand to see a 25% increase in the cost of imported goods, should see the cost increase partially offset by the 13% devaluation of the Mexican Peso against the US dollar