Tax saving vs. wealth maximisation??

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

17 January 2014 In many places i've read that DEBT FINANCING HELPS IN TAX SAVINGS.

Let us take an eg.
Financing from Equity Debt
EBIT 100000 100000
Interest - 10000
______ _______
100000 90000
TAX@20% (20000) (18000)
______ _______
EAT 80000 72000

Here, due to debt financing, offcourse we are saving tax of rs. 2000, but ultimately our income(EAT) is reduced(for 8000)!

SO WHAT"S THE USE OF TAX SAVING WHEN IT IS AFFECTING OVERALL AIM OF WEALTH MAXIMIZATION?????
Please Help??

Nikhil Kaushik

Nikhil Kaushik (Expert)
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18 January 2014 dear friend,

you need to look at return on equity.. Assuming in both the cases total capital employed is same, in case of debt funding, your equity employed will be lower with a higher return on equity.

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Querist : Anonymous

Querist : Anonymous (Querist)

18 January 2014 Thank u sir, thank u very much...now i m feeling lighter !!

Nikhil Kaushik

Nikhil Kaushik (Expert)
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19 January 2014 you are welcome my friend...

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