if both the tax rate & interest rate is 10%. then from
where the company raise fund from debt or equity.
and which one is more suitable.
Answers were Sorted based on User's Feedback
Answer / siddhartha bhattacharjee
Debt capital is more suitable as it gives "TAX shild", i.e,
before calculating tax for a company the interest bearing
to debt capital is deducted which minimizes the taxable
income of the firm leading to lesser tax paid by the
compnay, where as if we use equity capital, divident is
paid from PAT so tax burden on the firm is larger.
Hence debt capital is always cheaper source of finance.
Is This Answer Correct ? | 7 Yes | 1 No |
Answer / amod kumar
debt is always considered as a cheaper source of finanace,
but this statement is correct only when company rate of
earning after adjustind tax is more than the fixed rate of
interest which is to be paid to debt holders. if company
earning is less than the debt rate, from where co will pay
the interst.
Is This Answer Correct ? | 1 Yes | 0 No |
Answer / anuj
Debt ang equity to raised is Rs 500
let income is Rs 100 ( When debt is raised )
intrest(-) 50
so, Tax (-) 5
PAT = 45
When equity is raised
intrest(-)0
Tax 50
PAT = 50 so,answer is equity option is better
Is This Answer Correct ? | 4 Yes | 10 No |
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