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i wish to understand the sense behind using tax shield as a saving.
Are we saying tax shield is the tax saving we have as a result of being all equity financed?kindly assist
If we are all equity financed, then there is no tax saving.
According to Modigliani and Miller, if there is no tax then it is irrelevant how a company raises finance – the overall cost of capital will stay the same, as will the total market value of the company.
However, with tax, there is a benefit to raising debt finance because the interest attracts tax relief.
It will help you to read Chapter 19 of the Paper F9 Course Notes, where Modigliani and Millers work is explained.
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