Question

Question: If a firm is eligible to receive tax credits, how might that affect its use of debt? Explain

Answer 1

Tax credit means of a company earns positive profit then they can set off these profits and thus save tax payments.

So assume a case if if compamy takes more of debt, the interest part is deducted from EBIT , so with more debt , there will be more interest part making EBT lower. Such lower that it becomes negative and tax credit account gets created . Thus in the yard of more debt the company doenst pays no taxes because of higher interest , gets tax credits which it uses to offset later years profits .