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7 Cards in this Set

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Interest coverage

EBIT/Interest on debt

Interest plus principal coverage

EBIT/(principal/(1-Tc)) + interest on debt

Cost of Equity

D1/P0 + g

Present value of tax sheild

(Tax rate × interest) / expected return on debt

Break even EBIT

(EBIT-c1)(1-t)) / s1 = (EBIT-c2)(1-t))/s2



c1, c2 = annual interest expense


s1, s2 = number of shares outstanding after finance

Relative tax advantage on debt

(1-Tp) / (1-Tpe)(1-Tc)



Tp = personal tax rate on interest


Tpe = effective personal tax rate on equity income


Cost of equity

Rf+(Rm-Rf)B (CAPM)