What Is Meant By The "tax Shield" In An Lbo?

1.	What Is Meant By The "tax Shield" In An Lbo?
Answer» This means that the interest a firm pays on debt is tax-deductible - so they save money on taxes and THEREFORE increase their CASH flow as a result of having debt from the LBO. Note, however, that their cash flow is STILL lower than it would be without the debt -saving on taxes helps, but the added interest EXPENSES still reduces Net INCOME over what it would be for a debt-free company. This means that the interest a firm pays on debt is tax-deductible - so they save money on taxes and therefore increase their cash flow as a result of having debt from the LBO. Note, however, that their cash flow is still lower than it would be without the debt -saving on taxes helps, but the added interest expenses still reduces Net Income over what it would be for a debt-free company.

Answer»

This means that the interest a firm pays on debt is tax-deductible - so they save money on taxes and THEREFORE increase their CASH flow as a result of having debt from the LBO.

Note, however, that their cash flow is STILL lower than it would be without the debt -saving on taxes helps, but the added interest EXPENSES still reduces Net INCOME over what it would be for a debt-free company.

This means that the interest a firm pays on debt is tax-deductible - so they save money on taxes and therefore increase their cash flow as a result of having debt from the LBO.

Note, however, that their cash flow is still lower than it would be without the debt -saving on taxes helps, but the added interest expenses still reduces Net Income over what it would be for a debt-free company.

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