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pg 30 chap 15

S

saksham

Member
Under tax what does " a reduced rate of tax deduction to reflect deferment may be used" mean?
 
The paragraph is talking about the unusual situation where a company is not yet making profits, but expects to do so in the future. A new company or a growing company for example might be in this situation. Where we would normally assume that debt interest reduces profits before tax, and therefore reduces tax, we would not be able to assume that for a new unprofitable company. If there are no profits, then there is no tax, so you cannot reduce your tax bill! So the sentence is saying that would could assume that the debt interest will reduce taxes is (say) 5 years, and bring this benefit into the equation, ut we cannot assume that it will have an immediate impact on efficiency.
 
Just for clarification, say that the corporate tax rate is 30%. However, because of the tenuous profitability of the company, you only take off say 15% off the gross cost of debt. Maybe the company can only deduct half its interest bill before it goes into the red for example.

Would this be reasoning that the textbook is hinting at?
 
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