Question

Which of the following types of capital has a tax benefit?

a.) Initial Public offering shares

b.) ordinary equity

c.) debt

d.) preference shares

Answer 1

Solution: Debt is the given type of Capital that has a tax benefit. This can be explained by the following simple example.

Example: We have two companies namely Company A & Company B. The proforma Income Statement are as under:

Income Statement
	Company A	Company B	Particulars
Sales	160000	160000
Less: COGS	-100000	-100000
Gross Profit	60000	60000
Less:Interest	-10000	0	Interest @ 10% p.a. on Debt of $100000 by Company A
Profit Before Tax	50000	60000
Less:Tax @ 50%	-25000	-30000	Tax in Company A's financial when compared with Company B's financial shows a Tax Saving of $5000
Profit After Tax	25000	30000

Thus again it is re iterated that only Debt is the type of capital with Tax Benefit.