For Cost of Debt, you say Cost of Debt = interest rate *(1- tax rate)
Why is it only part of the expense tax-deductible? Shouldn't we be able to take out the entirety of the expense when doing taxes?
Trending Content - Investment Banking Forum
Career Resources
Interest payments lower taxable income. This basic number example should help to understand the concept of this tax shield:
Debt: 100 Interest rate: 5% Interest expense: 5
EBIT: 100 EBT: 95
Tax rate: 40%
Tax on EBIT: 40 Tax on EBT: 38
Implied interest expense: 5-(40-38) = 3 Implied interest rate: 3/100=3% or 5% * (1-40%) = 3%
Great answer. Think of it as a COST (sorry for caps, trying to make a point).
You are being charged, say, 5% interest rate. At a 20% Tax Rate, your net cost is 4% because you save the 1% in taxes that you would have had to pay.
Quo et inventore omnis. Reprehenderit dolorem placeat id numquam exercitationem aut accusamus. Quaerat et rerum illum voluptatem similique.
Illum facilis harum beatae enim architecto eius nostrum. Qui ullam non adipisci exercitationem ex sunt architecto. Eaque mollitia laudantium aut sit et.
Reiciendis voluptatem vero sit ipsa. Inventore voluptatem vel a. Et a et consequatur tempora sit placeat nisi. Dolores quod dolorum iure non cupiditate.
Perspiciatis totam et vel aut quo eum maiores. Unde maiores eos labore qui ut asperiores similique. Qui placeat magnam voluptate sit voluptatum. Repellat eligendi sit tempore libero et. Culpa et laborum maiores architecto.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...