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    4a Tax Structure

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    Bijoy Salahuddin
    Table 1 shows the tax rates for different types of companies. One major reason companies take on debt is for the tax benefit, as interest expenses are tax deductible. This significantly reduces costs. While higher debt induces greater financial risk, contradicting MM's proposition 2, the tax shield makes it worthwhile. Such tax savings increase firm value by lowering interest expenses. Though companies in higher tax brackets could use more debt for greater tax benefits, some successful companies like BATBC choose to operate with no debt despite paying higher taxes.

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    4a Tax Structure

    Uploaded by

    Bijoy Salahuddin
    10 views1 page
    Table 1 shows the tax rates for different types of companies. One major reason companies take on debt is for the tax benefit, as interest expenses are tax deductible. This significantly reduces costs. While higher debt induces greater financial risk, contradicting MM's proposition 2, the tax shield makes it worthwhile. Such tax savings increase firm value by lowering interest expenses. Though companies in higher tax brackets could use more debt for greater tax benefits, some successful companies like BATBC choose to operate with no debt despite paying higher taxes.

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    4a Tax Structure

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    Table 1 shows the tax rates for different types of companies. One major reason companies take on debt is for the tax benefit, as interest expenses are tax deductible. This significantly reduces costs. While higher debt induces greater financial risk, contradicting MM's proposition 2, the tax shield makes it worthwhile. Such tax savings increase firm value by lowering interest expenses. Though companies in higher tax brackets could use more debt for greater tax benefits, some successful companies like BATBC choose to operate with no debt despite paying higher taxes.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as docx, pdf, or txt
    10 views1 page

    4a Tax Structure

    Uploaded by

    Bijoy Salahuddin
    Table 1 shows the tax rates for different types of companies. One major reason companies take on debt is for the tax benefit, as interest expenses are tax deductible. This significantly reduces costs. While higher debt induces greater financial risk, contradicting MM's proposition 2, the tax shield makes it worthwhile. Such tax savings increase firm value by lowering interest expenses. Though companies in higher tax brackets could use more debt for greater tax benefits, some successful companies like BATBC choose to operate with no debt despite paying higher taxes.

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    of 1

    Tax Structure and Debt Policy

    Companies
    Tax
    Publicly Traded Company
    27.5%
    Non-publicly Traded Company
    37.5%
    Bank, Insurance & Financial Company (Except merchant bank)
    42.5%
    Merchant bank
    37.5%
    Cigarette manufacturing company
    45%
    Publicly traded cigarette company
    45%
    Mobile Phone Operator Company
    45%
    Publicly traded mobile company
    45%
    One of the major reason of taking debt is to get the tax benefit which significantly reduce the
    interest expense due to its tax deductibility. It is logical to say a higher debt will induce higher
    tax savings. Though it is contradictory to MMs proposition 2 which tells us that taking higher
    debt shareholders will not be better off because of financial risk. However the tax shield makes
    the difference. Such tax savings increase the firms value since the interest expense become
    lower.
    Table 1: Tax structure of different companies

    Table 1 shows the marginal tax of different companies. According to trade off theory company
    should use such a debt equity ratio which will provide the highest tax shield with the lowest
    financial distress. It will be wise to think the company with higher tax bracket will use higher
    debt to enjoy higher tax benefit but in real world despite of higher tax bracket so many
    companies choose not to use higher debt e.g. BATBC which is not using any debt but the
    company is performing better with higher EPS.

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