Post tax interest saved

Post tax interest saved comes into discussion whenever there’s a repayment (or conversion) of loan notes.

As long as the loan notes are in issue, entity will be incurring interest expense. This will reduce earnings but will save some tax as loan interest is always tax-deductible.

If these loan notes are repaid, the interest expense will be saved but the tax savings from that expense will be lost. So, post-tax interest saved will be the amount which will increase earnings of the entity.

Hope it helps.

If loan notes are repaid, there will be NO interest expense anymore!

Here’s an example:

PBIT = $100,000
Finance cost = $40,000
Tax rate = 30%

Profit before tax = 100,000 – 40,000 = 60,000
Tax expense = 60,000*30% = 18,000
Profit after tax = 60,000 – 18,000 = 42,000

Now, if the loan notes are repaid and there’s no interest expense, then:

Profit before tax = 100,000
Tax expense = 100,000*30% = 30,000
Profit after tax = 70,000

As you can see, earnings increased from $42,000 to $70,000 but the Tax expense increased from $18,000 to $30,000.
In conclusion, repayment of loan notes increased earnings by saving interest expense but also resulted in increased tax expense.

Clear now?