Du Pont

CFA Level I FRA
#1

It sounds contradictory to me, but the greater the interest burden and the tax burden, the greater the ROE, right?

EBT=100; NI=90 > Tax Burden = 0,9

EBT=100; NI=99 > Tax Burden = 0,99

(if we’re multiplying terms, obviously the greater the terms, the greater the result (ROE))

Maybe the names are confusing me… Any additional explanation?

Thanks!

#2

This stems from the bizarre definitions of tax burden and interest burden: the amount _ left over after _ taxes or interest, not the amount _ of _ taxes or interest. Higher interest burden means _ lower _ interest; higher tax burden means _ lower _ taxes. It makes no sense, but those are the definitions with which we have to live.

#3

An Increase in tax burden/ interest burden implies a decrease in tax burden RATIO/ interest burden RATIO.