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Tax exhaustion

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Tax exhaustion

  • This topic has 3 replies, 2 voices, and was last updated 5 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • August 30, 2019 at 2:18 pm #543845
    therockky
    Member
    • Topics: 7
    • Replies: 10
    • ☆

    Tax exhaustion can increase the cost of borrowing at high levels of gearing. Can someone explain me this sentence?

    Thanks

    August 30, 2019 at 3:55 pm #543862
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54680
    • ☆☆☆☆☆

    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.

    August 30, 2019 at 8:05 pm #543890
    therockky
    Member
    • Topics: 7
    • Replies: 10
    • ☆

    Oh ok.. Got it Sir!! Thank you so much

    August 31, 2019 at 8:46 am #543936
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54680
    • ☆☆☆☆☆

    You are welcome 🙂

  • Author
    Posts
Viewing 4 posts - 1 through 4 (of 4 total)
  • The topic ‘Tax exhaustion’ is closed to new replies.

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