Example of debt finance, Finance Basics

Assignment Help:

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.


Related Discussions:- Example of debt finance

Capital structure ratio, Capital Structure Ratio Gearing/Leverage/Capi...

Capital Structure Ratio Gearing/Leverage/Capital Structure Ratio The ratio signifies the extent whether the firm has borrowed fixed charge capital to finance the

Determinants of working capital needs, Determinants of Working Capital Need...

Determinants of Working Capital Needs There are few factors that determine the firm's working capital needs. These factors are comprehensively enclosed with a Textbook of Busi

Roa - return on assets, ROA - Return on Assets The Average of the ...

ROA - Return on Assets The Average of the industry ROA was 10.02% for 2004, 6.81% for 2005, and 7.32% for 2006. The chart showed that Lenovo had a little bit higher ROA th

Compound interest and compound amount.., a debt off Rs1000 with interest at...

a debt off Rs1000 with interest at 10% compounded quarterly will be repaid by payments Rs. 200 at the end of 3 months and three equal payments at the end of 6 9 and 12 months. find

Characteristics of an efficient tax system, Question 1 a) What are the...

Question 1 a) What are the main characteristics of an Efficient Tax system? b) What are the instruments of Public Finance and explain their efficiency. c) Explain what

Calculating cost of purchasing & prepare income, The Jacobs company needs t...

The Jacobs company needs to acquire a new lift truck for transporting its final product to the warehouse. One alternative is to purchase the truck for $45,000. Maintenance of th

What do you mean listing of securities, What do you mean listing of securit...

What do you mean listing of securities? Explain. Listing of Securities: Listing means admission of the securities to dealings on a recognized stock exchange. Securities of an

Functions of the financial markets, Functions of the Financial Markets ...

Functions of the Financial Markets Functions of the Financial Markets or Institutions in Economy 1. Allocation of financial resources to the mainly productive units. Saving

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd