simple LBO question: taxes and interest expense?
hi team... i am confused. scenario below:
Tax rate = 40%
EBIT = $150
Interest expense = $100
Every template LBO model I see would calculate taxes by taking $150 - 100 = $50 * 40%...
However, I am also seeing online that interest expense is not fully tax deductible... that there is a 30% limit of EBIT.
so why is every model i see taking EBIT less all interest expense to arrive at taxable income? that assumes all the interest expense is tax deductible?
thx u so much.
For simplicity. In actuality calculating taxes is far more complicated and for modeling exams, it really doesn’t matter and that’s not the point of the exam. So for exam purposes, unless they specifically ask you do take that into account, I would just keep simple and maybe add a comment saying you did it for simplicity rather than build a tax build and take into account maximum interest deductibility.
Makes sense but still a bit confused because people use the "simplicity" models of EBIT - all interest expense = taxable income in real M&A deal modeling. to assess if cash flow is enough to cover interest obligations.... why? couldn't that result in a disaster situation where you did this sort of projection and then end up not having enough cash to cover both taxes and interest expense?
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