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I have a question on how you calculate the amount to reduce in taxes due to using debt. For example a company has a cost of equity of 18%.
I have a question on how you calculate the amount to reduce in taxes due to using debt. For example a company has a cost of equity of 18%. A bank will make a loan for equipment for $200,000 at an annual interest rate of 12% (before tax cost of debt). While long-term debt is not included in the company's current capital structure, it believes a 30% debt, 70% equity capital mix. Based on this information the WACC has been calculated as 15%.The income tax rate is 30%. If the EBIT is 32,000 and the normal tax is 30% or EBIT, how does it get adjusted to to account for interest on the loan since it is tax deductible? Thanks!
