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

Rouche, Why should Roche care about the spreads on debt instruments

Why should Roche care about the spreads on debt instruments

Smsi and s&p, The financial data is of little value in its raw form. Howeve...

The financial data is of little value in its raw form. However, the same may be analyzed and be put in the form more meaningful to the recipients. This is normally done by using va

Commercial bank for short term loans, Commercial Bank for Short Term Loans ...

Commercial Bank for Short Term Loans Purpose Why Commercial Banks Prefer To Lend Short Term Loans a) Long-term forecasts are not only difficult although also vague as unc

What is the objectives of listing, What is the Objectives of Listing ...

What is the Objectives of Listing Objectives of listing are mainly to: (i) Provide liquidity to securities. (ii) Mobilize savings for economic growth. (iii) Protect

Asset based valuation - example, Asset Based Valuation - Example K and...

Asset Based Valuation - Example K and K Company Limited is planning to absorb three other companies so as to realize its sales records of Sh.500, 000 per annum.  Its accountan

Classification of preference share capital, Classification of Preference Sh...

Classification of Preference Share Capital i) Redeemable Class Redeemable preferential shares are bought back via Issue Company after minimum redemption duration however

Fiscal function, should be provied on a centralised or a decentralised basi...

should be provied on a centralised or a decentralised basic?

Definition of stock exchange, Definition of Stock Exchange According to...

Definition of Stock Exchange According to Pyle: "Stock Exchange are market places where securities which have been listed thereon, may be bought and sold for either investme

Personal Finance, Which of the following is true with regards to rising int...

Which of the following is true with regards to rising interest rates. A. Use long-term loans to take advantage of current low rates. B. The term of the loan is ot impacted by risin

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