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

Disadvantages of floatation of new shares, Disadvantages of Floatation of N...

Disadvantages of Floatation of New Shares 1. The cost of getting a quotation is high, mainly when a new issue of shares is completed and the company is small. It means that su

Calculate the expected sale, 1. Suppose company A expects to increase unit ...

1. Suppose company A expects to increase unit sales of i-phone by 15% per year for the next 5 years. If you currently sell 3 million i-phones in one year, how many phones do you ex

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

Partnership, Partnership Definition -Partnership may be defined as a re...

Partnership Definition -Partnership may be defined as a relationship between persons carrying on a business in common with a view of profits. In partnership business, two or mo

Investment analysis, Ask questConsider an 8% coupon bond selling for $953.1...

Ask questConsider an 8% coupon bond selling for $953.10 with 3 years until maturity making annual coupon payments. The interest rates in the next 3 years will be, with certainty, r

Valuation a d rates of return, You are called in as a financial analyst to ...

You are called in as a financial analyst to appraise the bonds of Olsen’s Clothing Stores. The $1,000 par value bonds have a quoted annual interest rate of 13 percent, which is pai

Goals of firm''s credit standards, Goals of firm's Credit Standards Th...

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

Micro economics, effect of gdp in the domestic market

effect of gdp in the domestic market

Time value of money problems, if you won the publisher''s clearing house $1...

if you won the publisher''s clearing house $10 million prize (payable as 30 pmts of $250,000 and $2.5m in yr. 30) and could invest the money at 8%, would you accept an offer of $3.

A. michael spence, A. Michael Spence An American economist who was awar...

A. Michael Spence An American economist who was awarded by the Nobel Memorial Prize in Economic Sciences. Spence is a lecturer of management at Stanford University in the Gradu

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