Question

Lets assume that:Corporate Taxes are 35% Taxes on Interest are 33% Taxes on Capital Gains and...

Lets assume that:Corporate Taxes are 35%

Taxes on Interest are 33%

Taxes on Capital Gains and Dividends are 15%

How much would $1 of EBIT be worth as interest income versus equity income?

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Answer #1

EBIT = $1 i.e., earnings before interest and Taxes
_________________________________________
Interest income, i.e., income earned through interest for which applicable tax rate is 33% :
Tax on interest income = $1*0.33 = $0.33
Earnings after deduction of tax on interst income = $1 - $0.33 = $0.67
Interest income = $0.67
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Equity income, i.e., income earned through equities - capital gains and dividends, etc. for which applicable tax rate is 15%.
Tax on equity income = $1*0.15 = $0.15
Earnings after deduction of tax on equity income = $1 - $0.15 = $0.85
Equity income = $0.85
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Conclusion: $1 EBIT would be worth $0.67 as interest income and $0.85 as equity income.

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