Tax Shield
Short definition
The tax shield is the cash tax saved because interest reduces taxable profit. In WACC, (1−T) maps that saving onto Kd; T is meaningful only if the shield can actually be used.
Detailed explanation
Persistent losses, carry-forward limits and thin-capitalisation cut the shield. APV discounts the shield separately; WACC embeds it in the weights — do not use both.
A sustainable shield is bounded by expected taxable profit and the debt policy. One year of high interest is not a permanent shield.
Why it matters for the CFO
“Debt is cheap because tax falls” is true only if the firm pays cash tax. In a loss-making firm Kd stays pre-tax; WACC falls to the wrong place.
How it is calculated
Faiz kalkanı ≈ Faiz × T (T, kalkanın fiilen kullanıldığı marjinal oran)
Variables in the formula
- T: Marginal corporate tax (if usable)
How to read it
Interest 80 mn TL, T 25% and full use → shield 20 mn TL. If T is unusable the shield is 0 and (1−T) in the formula is pulled toward 1.
Numerical example
Interest 80 mn TL, marginal T 25% and the shield is usable → cash tax saved = 20 mn TL.
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Definitions are educational. They are not investment, credit or tax advice.