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‘Tax exhaustion can increase cost of borrowing at high levels of gearing”
I dont understand this statement. How does tax exhaustion increase cost of borrowing?
Normally tax makes the cost of debt cheaper because the interest is tax allowable.
However that assumes that the company is making enough profit to cover the interest.
High levels of gearing mean more interest is being paid. That might mean that the interest is higher than the profit available and so the company will not get the full benefit of the tax saving on the interest. If they are not getting the full tax saving then the cost of debt will be higher.
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