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

Net present value method - dcf technique, Net Present Value Method - DCF Te...

Net Present Value Method - DCF Technique The method discounts outflows and inflows and ascertains the total present value via deducting discounted outflows from discounted inf

Financial management, Financial Management On the other hand a financi...

Financial Management On the other hand a financial manager has to meet the company's strategic or long term needs as long term investment are helpful to the company since:

Comparison between modern and traditional methods, Comparison between Moder...

Comparison between Modern and Traditional Methods Both modern and traditional methods will indicate or show strong weaknesses which like a company cannot use either to choose

Functions of central depository system or cds, Functions of Central Deposit...

Functions of Central Depository System or CDS 1. Immobilization of securities that is removal of physical movement of securities. 2. Dematerialization that is removal of ph

Example of capital asset pricing model, Example of Capital Asset Pricing Mo...

Example of Capital Asset Pricing Model KK Ltd is an all equity firm whose Beta factor is 1.2, the interest rate on T. bills is currently at 8.5% and the market rate of return

IS-LM, After read all the available information carefully, prepare a two pa...

After read all the available information carefully, prepare a two page (double-spaced) essay and answer the following questions: Assume that we have the following data: C=100+0.50Y

Book value and market to book value per share, Book Value and Market to boo...

Book Value and Market to book value per share Book value per share (BVPS)  = Net worth Equity/No. of ordinary shares It is called also liquidity ratio that show

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