Question
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Prestige Productions Ltd is planning an expansion internationally and is considering its financing options. One senior...
Prestige Productions Ltd is planning an expansion internationally and is considering its financing options. One senior manager of the company has advised the Board of Directors that using debt is cheaper than equity as interest is tax deductible, whereas dividends are not. As a shareholder of Prestige Productions Ltd, do you agree with this statement? Why or why not?
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Expert Solution
The statement is true as first debt is anyways cheaper than equity and to add to it the tax deductibility of interest, debt is much cheaper. Interest is treated as expense and hence it is deducted from EBIT to calculate taxable income on which taxes are calculated.
On the other hand, dividends are not considered as expense and therefore they are not tax deductible.
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