Example of debt finance, Finance Basics

Example of Debt Finance

An example:

Interest = 10% tax rate = 30%

The effective cost of debt (interest) = Interest rate (1 - T)

= 10%(1-0.30)

= 7%

Consider companies A and B

Company                  A                                      B

Sh.'000'                  Sh.'000'

10% debt                1,000                                 -

Equity                          -                                1,000

                                  1,000                           1,000

The tax rate is 30% and earnings previous interest and tax amount to Ksh.400,000.  All earnings are paid out as dividends. Calculate payable via each firm.

Company                                 A                                  B

                                                Sh.'000'                       Sh.'000'

EBIT                                           400                             400

Less interest 10% x 1,000          (100)                                 -     

EBT                                            300                            400

Less tax @ 30%                         (90)                            (120)

Dividends payable                      210                              280

Company A saves tax equal to Sh.30,000(120,000 - 90,000) since interest charges are tax permit able and reduce taxable income.

Posted Date: 1/29/2013 4:30:24 AM | Location : United States







Related Discussions:- Example of debt finance, Assignment Help, Ask Question on Example of debt finance, Get Answer, Expert's Help, Example of debt finance Discussions

Write discussion on Example of debt finance
Your posts are moderated
Related Questions
MM Dividend Irrelevance Theory Such was advanced via Modigliani and Miller in 1961.  The theory asserts to a firm's dividend policy has no effect on cost of capital and on its

Goals of firm's Credit Standards The goal of the firm's credit policy is to maximize the value of such firm. To complete this goal, the evaluation of investment in receivables

Following details are related to three companies which are identical except in terms of ''''r''''. Company ABC Ltd. MNC Ltd. XYZ Ltd. Cost of capital 10% 10% 10% Earn per Share Rs

Debt Finance in US of Small Companies Why It CAN Be Difficult For Small Companies to Raise Debt Finance in US Lack of safety avoidances of finances available

Accounts Payable Turnover Ratio Ratio for Account Payable Turnover is as Follow: Creditors/accounts payable turnover = Annual credit purchases /Average creditors

Investment Opportunity and Capital Structure Investment Opportunity Lack of suitable investment opportunities, that is so, by positive returns or N.P.V., may encourage a


Advantages of Using Debt Finance Interest on debt is a tax permit able expense and as that it is reduced via the tax allowance. The cost of debt is fixed regardless of

Pick a product of your choice and identify the stages of production