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

Partnerships - types of business organisations, Partnerships - Types of B...

Partnerships - Types of Business Organisations Defination "The relationship, that exists with persons carrying on a business in common by a view of profit." Formati

Calculate the price of a non-zero coupon bond, Question: A non-zero cou...

Question: A non-zero coupon bond carries a coupon rate of 8 percent and has 9 years until maturity. It sells at a yield to maturity of 6 percent. The par value of the bond is

Foundation of Building Wealth, I am struggling with a PowerPoint Presentati...

I am struggling with a PowerPoint Presentation 8-10 slide the calculations and understanding Traditional IRAs and Roth IRAs, I guess that I need to prepare this for an audience. Sh

Pursuing self esteem ambitions and creative accounting, Pursuing self estee...

Pursuing self esteem ambitions and Creative Accounting Pursuing power and self esteem ambitions This is called "empire building" to enlarge the firm via acquisitions and me

Creditors trade - measuring business performance, Creditors Trade - Measuri...

Creditors Trade - Measuring Business Performance Creditors Trade These are interested in the company's capability to meet their short-term obligations as and whenever the

Capital to debt issuers, In 1998, the Syndicated Bank Loan market (defined ...

In 1998, the Syndicated Bank Loan market (defined as loans having more than two bank lenders) was a vast and cheap source of debt financing for U.S. corporations.  This market was

Financial statement, Review the budget below and answer the questions follo...

Review the budget below and answer the questions following the budget. FINANCIAL ACCOUNTING—STATEMENT OF REVENUE AND EXPENSES Statement of Revenue and Expenses for Group Practice f

What is holding period return, What is Holding Period Return/Return ...

What is Holding Period Return/Return Holding period yield (HPY) measures the total return from an investment during a given time period in which asset is held by the investo

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