Example: Tax effects of' financing with debt with stock with debt EBIT 400,000 400,000 interest expense 0 50,000 EBT 400.000 350000 taxes (34%) (136,000119,000 EAT 264,000 231,000 dividends (50,000 0 Retained earnings 214,000 231.000
Example: Tax effects of financing with debt with stock with debt EBIT 400,000 400,000 - interest expense 0 (50,000) EBT 400,000 350,000 - taxes (34%) (136,000) (119,000) EAT 264,000 231,000 - dividends (50,000) 0 Retained earnings 214,000 231,000
After-tax Before-tax Marginal o cost of %o cost of tax Debt Debt rate
After-tax Before-tax Marginal % cost of % cost of x tax Debt Debt rate = 1 -