Question

Based solely on Corporate Finance, and using correct terminology, discuss why a decrease in the corporate tax rate could lead to poorer projects being accepted by companies.

( Please write a little more if possibly)

Answer 1

biq Companies COTpOTate ax is the lnCom toi impuscd on co mpan usually -falls under a because of bi cb a high porlion of ils -funds go to the In come tax bracket government тдигтed кly- lo Fo7 Example in india, indian Companics Рач Зо/. of -lheit income cs tax cobereas a Готeign Cormpang doing busintss in India тедuired to Раy tor a yoy. cwith Such bigh Tates a PUTlion of the -sunds of thc Company Сompany - Therefoте, the in those Profects cohich Jive d1ained -frD m the hands of ihe company tries to inVest only bigh yield Company leaving behind those Small PTojects cobich -ihough coould bot yield high Telurns but Society Therefo07c Imposed particula Seetion of the the qovenment veduces the taxcs CorpoYorles, they coould be able -to învesl în pooie pToftcts and we Know that fof accepting P1oject we discount free cash -flows . deprecialion t-Net Capital after tax Salvage Volue- capital eapendilure FTee Cash floos oking So cohen tax Tates de(ve ases the Value of -liee cash floo of inctease due to incTcase in opeTations but due to eduction in not layesSo Poo1e p1oject cohose ope1aling incomes a1e less will be accepted due to decreased toxes- DecTeased day Tate

So (ost of debt cuill Incieasc cnd ove10/1 Wacc which discaunling coi make debt cosll^ as the inlcresl Tale -lay Sbleld cwill decease Jale coil inCiease. Houwever lhe effecl of Tncieass n (BIT wll be moie than lhe e-ffect of in(1ease în a measure for deleimtoing acceplobility lalnce. Hence Npv cohich Poo1e P1ojecls athaclive making pToject coill încease operating Als o, the impacl ol decrease in ta on înc1ease deprectation tax Income coil be moiethan the decrease Shield and bentc fYee Cash floo wlli inCYease moTe Such PYojects coill be unViable if tax Tales Tevenl to the or iginal level the Company moiolains Some Capital Structu1e the Capttal charge (ie sthe lAACC x capital employcd) turthe affe ting coill înCTea se the Company So -to ensure IAIACC is maintained ai optimal level -the Caprlal Slrucluie needs to be modilied which needs ettra flolalion and adminis-tra-tfon Cost Such bidden Costs ane fn Npv Calcelrtions Just to Courle the effecl of -lox oplimal debt equtty not ncluded needs to be adjusted Talio