15. Explain how the tax shield in the use of debt may be changing with the adoption of eliminating the double taxation of dividends (allowing a firm to deduct dividends on stock in a manner similar to interest on debt). The use of debt financing is always been favor with taxation rather than taxing the equities dividend. As it is because payment which has been given for financing are deductible rather that than the returns from equity or the dividends received are taxable. There have been always ample scopes for companies to collect debt. The company should work out on the plan to collect debt in such a way that debt becomes beneficial for the company in terms of increase in EPS, profitability and value of the firm. The pre tax rate of interest is invariably lower than the return required by the equity capital suppliers. Cost advantage due to ability to set debt interest against profit for tax purpose. It always been an optimal capital structure is required where the tax benefit is equal to the cost of
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This note was uploaded on 02/21/2012 for the course ACT 492 taught by Professor Ngo during the Fall '11 term at Colorado.