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interest tax shield it's beneficial for companies to raise debt and pay interest

hn_throwaway_99 3y ago
That makes 0 sense without more context or information. Even if interest is a tax deductible expense, it doesn't make sense to spend a dollar to save 30 cents.
- s1artibartfast 3y ago
  You also make a dollar in the process. You take out a $1 loan (bond). You then pay yourself with the $1 (stock buyback). You are realizing future profits today. As long as the cost of bringing those profits forward is less than reward, you net profit. Interest tax deductions are just a perk.
  - hn_throwaway_99 3y ago
    Your comment does nothing to aid my understanding of the situation. Yes, anyone can take out a loan to get money now that they don't have to pay off until the future. Nobody misunderstands that. And I also fully understand taking out loans to invest in productive capacity when you need that capital. But if you have a couple billion dollars sitting in the bank, presumably making less interest than you'd need to pay for a bond issuance, then it still doesn't explain why issuing the bond makes sense.
    - s1artibartfast 3y ago
      The key piece missing then is corporate valuation. This is an arbitrage play based on the difference between investor sentiment and debt on the books. The idea is that their market valuation will go down less than $1B if they issue a $1B bond. Similar nonlinearities are true for other corporate holdings. Facebook has $40B cash on hand. If they had $0 on hand, That would hurt their valuation by a lot more than $40B because investors like to see some cash in the bank, and see it as a red flag. Similarly, Investors dont care much about a little debt, and facebook is an outlier in that it has very low levels of corporate debt.
- brotoss 3y ago
  Taking on debt can lower your cost of capital. In a vacuum raising debt increases the value of a company too. Its just corporate finance theory

That makes 0 sense without more context or information. Even if interest is a tax deductible expense, it doesn't make sense to spend a dollar to save 30 cents.

s1artibartfast 3y ago
You also make a dollar in the process. You take out a $1 loan (bond). You then pay yourself with the $1 (stock buyback). You are realizing future profits today. As long as the cost of bringing those profits forward is less than reward, you net profit. Interest tax deductions are just a perk.
- hn_throwaway_99 3y ago
  Your comment does nothing to aid my understanding of the situation. Yes, anyone can take out a loan to get money now that they don't have to pay off until the future. Nobody misunderstands that. And I also fully understand taking out loans to invest in productive capacity when you need that capital. But if you have a couple billion dollars sitting in the bank, presumably making less interest than you'd need to pay for a bond issuance, then it still doesn't explain why issuing the bond makes sense.
  - s1artibartfast 3y ago
    The key piece missing then is corporate valuation. This is an arbitrage play based on the difference between investor sentiment and debt on the books. The idea is that their market valuation will go down less than $1B if they issue a $1B bond. Similar nonlinearities are true for other corporate holdings. Facebook has $40B cash on hand. If they had $0 on hand, That would hurt their valuation by a lot more than $40B because investors like to see some cash in the bank, and see it as a red flag. Similarly, Investors dont care much about a little debt, and facebook is an outlier in that it has very low levels of corporate debt.
brotoss 3y ago
Taking on debt can lower your cost of capital. In a vacuum raising debt increases the value of a company too. Its just corporate finance theory