imported>Doug Williamson |
imported>Doug Williamson |
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| ''Tax and treasury.''
| | Term debt is debt which has an agreed term or maturity. |
| | | Normally the term when the debt is drawn down would be greater than one year. |
| 1.
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| Broadly, the benefit to a taxpayer of the tax deductibility of certain business expenses - including borrowing costs - thus reducing their taxable income and their tax expenses.
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| The term most often refers to borrowing costs - including debt interest - which are normally tax-deductible.
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| This gives rise to tax shield benefits and reduces the after-tax cost of debt for corporate borrowers.
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| In cash terms, the annual tax savings for a tax-paying corporate borrower can be quantified as:
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| Annual tax-deductible debt servicing costs paid (D x Kd) x relevant rate of corporation tax (t)
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| <span style="color:#4B0082">'''Example 1'''</span>
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| D = Debt, for example $100m.
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| Kd = Pre-tax % cost of debt, for example 5%.
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| t = Relevant corporate tax rate, for example 28%.
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| So the annual tax shield benefit in $m is:
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| = 100 x 0.05
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| = $5m annual interest charge, reducing annual taxable profits by $5m
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| Related annual tax saving:
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| = $5m x 28% tax rate
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| = $1.4m.
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| Another perspective on quantifying tax shield benefits is the reduction in after-tax cost of debt.
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| <span style="color:#4B0082">'''Example 2'''</span>
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| = 5% x (1 - 0.28)
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| = 3.6%.
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| 3.6% in this case compared with the before-tax cost of debt of 5%.
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| 2.
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| More narrowly, the total present value of all of the expected future related cash flow benefits arising from the use of debt.
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| The total present value of the expected future cash flow benefits from the tax savings can be quantified/estimated by capitalising the annual saving at the pre-tax cost of debt.
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| A simple estimate values the cash flow benefits as a fixed perpetuity, using the perpetuity factor 1 / Kd.
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| <span style="color:#4B0082">'''Example 3'''</span>
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| Annual saving = $1.4m
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| Kd = 5%
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| Total present value of tax shield:
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| = 1.4 x (1 / 0.05)
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| = $28m.
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| It can also be quantified more simply as D x t.
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| <span style="color:#4B0082">'''Example 4'''</span>
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| = 100 x 0.28
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| = $28m as before.
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| == See also == | | == See also == |
| * [[Adjusted present value]] | | *[[Debt]] |
| * [[Corporation Tax]] | | *[[Term loan]] |
| * [[Cost of debt]]
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| * [[Cost of capital]]
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| * [[Cost of financial distress]]
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| * [[Gearing]]
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| * [[Ordinary shares]]
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| * [[Perpetuity]]
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| * [[Preference shares]]
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| * [[Tax relief]]
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| [[Category:Accounting,_tax_and_regulation]]
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| [[Category:Corporate_finance]]
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