Hi, I am having problems understanding (1-Tax Rate) factor when calculating dilutive EPS - debt and in other place used. Can anyone explain its significance.
hi. Wen they use (1-tax rate) all they doin is calculating the AFTER TAX figure. So at a 30% tax rate with income of 100, the tax amount is 30 and net income is 70. Now if u said 1-0.30 times 100 u stil get 70. Two ways of doin the same thing. And this applies to all scenarios from calculating after tax cost of debt to deferred tax calcs. Hope this helps.
why isnt the same factor applied to common stock and preffered stock. Arent they taxed on gains
We are talking about payments made to HOLDERS of stocks, preferred stock and debt. Payments made to debtholders i.e. interest is recognized on the income statement so it lowers income before tax and provides the tax shield. Payments made to ordinary and preferred shareholders i.e. dividends are not listed on the income statement; they’re listed in the statement of changes to equity. Bigspydee: You’re thinking of investments in common and preferred stock, not issuance of these securities.