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  3. an investor considers whether to invest in debt or

An investor considers whether to invest in debt or equity of LIPPBORG PLC. Since he...

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Finance

An investor considers whether to invest in debt or equity of LIPPBORG PLC. Since he already has to pay a high personal tax rate, he does not want to pay more taxes than necessary. Therefore, he weighs the pros and cons of investing in bonds or equities in the local financial markets. The personal tax rate on interest income is 30%, the corporate tax rate is 21% and the tax rate on dividends/capital gains is 15%. Which strategy do you recommend the investor please explain your assessment.

LIPPBORG PLC wants to assess the value of interest savings due to the tax deductibility of interest on debt. The corporate tax rate is given above. The total debt stands at $19 million and the return on debt is 7.5 %. In case the current level of debt is permanent,

  • calculate the annual interest expense (before and after-tax consideration) and the present value of the perpetual tax shield.
  • explain limitations/conditions for utilization of the tax shield

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