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Tax exhaustion can increase the cost of borrowing at high levels of gearing. Can someone explain me this sentence?
Thanks
The cost of borrowing is normally calculated after taking account of the tax saving on the interest payments i.e. the after-tax cost of debt.
However with very high levels of gearing, it can be that the interest payments are more than the profit before interest and therefore there is no tax payable and they are not getting the full benefit of the tax saving on the interest. If they are not getting the full benefit of the tax saving, then the cost of debt is higher.
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