For companies with very high interest expense, or very low EBIT, the interest expense limitation will reduce the tax advantage to issuing debt and the equation, K d (Cost of debt) = Y(1 − T ), would need to be adjusted to reflect the impact of the new tax law.

Question

Quizplus · Accepted Answer

The statement is true. For companies with high interest expense or low EBIT, the interest expense limitation under the new tax law can reduce the tax benefits of issuing debt. This would affect the cost of debt equation, which would need to be adjusted to reflect the impact of the new tax law.

For Companies with Very High Interest Expense, or Very Low