Debt Policy Präsentation

8/9/2019 Debt Policy Prsentation

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II. Capital Structureand Corporate Tax


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Structure

1. Debt and Taxes

2. Interest Tax Shield

3. Present Value of Tax Shield

4. Tax Shield and Compan Value

!. Corporate Taxes and "#CC


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Is debt polic irrele$ant%


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Is debt polic irrele$ant%

The all rel hea$il on debt&


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1. Debt and Taxes #d$anta'es of debt (nancin')

Interest is a tax*deductible expense.

+,uit income is sub-ect to corporate tax.


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1. Debt and Taxes * +xample

Zero debt $500.000 ofdebt

+xpected operatin' income 12!./// 12!.///

Debt interest at 1/0 / !/.///

efore*tax income 12!./// !.///

Tax at 3!0 43.!/ 2.2!/

#fter*tax income 1.2!/ 4.!/

Combined debt and e,uitincome

1.2!/ 5.!/


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Tax at 3!0


1.2!/ 5.!/


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Total income increases b 1.!//

6one spend on interest is not taxed)

!/./// x /73! 8 1.!// tax sa$in's



Tax at 3!0


1.2!/ 5.!/


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These sa$in's are called interest taxshield.

#nnual tax shield 8 interest x tax rate

#nnual tax shield 8 9debt x rD: x tax rate

2. Interest tax shield


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2. Interest tax shield "ho earns this mone%

Debt in$estors%

+,uit in$estors%

Debt in$estors) (xed amount of interest

Shareholders) recei$e all the bene(ts ofthe tax shield


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3. Present $alue of tax shield

#nnual tax shield) 1.!//




1.2!/ 5.!/


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onds are replaced7 debt is permanent




1.2!/ 5.!/


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onds are replaced7 debt is permanent

Present $alue 9PV: of the tax shield%




1.2!/ 5.!/


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PVtax shield 8 annual tax shield ; rD

PVtax shield 8 9debt x rDx tax rate: ; rD

PVtax shield 8 debt x tax rate


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1. T)


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2. T) losses can occur

3. #ssumptions of PV tax shield


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3. #mount of debt is (xed.

>T) rebalance of capital structure

9constant debt e,uit ratio:



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The formula o$erestimates the PresentValue of the tax shields.



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1.2!/ 5.!/

4. Tax shield A compan $alue

Beturn demanded b shareholders) 127!0

Compan $alue 9ero debt:)

1.2!/ ; 127!0 8 !/.///


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1.2!/ 5.!/


Beturn demanded b shareholders) 127!0

Present Value of tax shield)

1!.///


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The PV tax shield increases the toda@scompan $alue.


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Value all*e,uit (nanced) !/.///

PV tax shield) 1!.///

Total Value of compan)2!.///


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Value of le$ered (rm 8

$alue if all*e,uit*(nanced + (debt x taxrate)

+ (P tax shield)


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!ar"et

#alue

ebt ratio

Value if all*e,uit*(nanced

PV tax shield


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!. Corporate Taxes A "#CC

"#CC 8 r+ x rD x x 91* tax

rate:

Eo$ernment pas 3!0 of interest costs7so)


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!. "#CC A Debt polic +xample)

Fe$era'e aGects a compan@s cost of

capital 9if the compan pas income tax:.


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!. "#CC A Debt polic&ates ofreturn(')

ebt%euit ratio

(*)

after*tax return on debt) 1/0 x /73!

r9e,uit:

"#CC 57!0

1!0

127!0

/ 17!4

7!0


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Implication of corporate taxesfor capital structure

Conclusions of the interest tax shield% orro= as much as possible

Increase companHs $alue 6inimie "#CC

#ll operatin' income used for interest o income tax J no more debts necessar

o e,uit income for shareholders

Debt Policy Präsentation

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