{"id":31322,"date":"2025-04-23T10:10:20","date_gmt":"2025-04-23T15:10:20","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/?post_type=biws_kb&#038;p=31322"},"modified":"2025-12-17T00:21:06","modified_gmt":"2025-12-17T05:21:06","slug":"interest-tax-shield","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/interest-tax-shield\/","title":{"rendered":"The Interest Tax Shield: Valuations, LBO Models, and More"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">The Interest Tax Shield: Valuations, LBO Models, and More<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/interest-tax-shield\/#The_Interest_Tax_Shield_in_Valuation_and_DCF_Analysis\">The Interest Tax Shield in Valuation and DCF Analysis<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/interest-tax-shield\/#The_Interest_Tax_Shield_in_LBO_Models_and_Deduction_Limits\">The Interest Tax Shield in LBO Models and Deduction Limits<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/interest-tax-shield\/#Factors_That_Matter_More_Than_the_Interest_Tax_Shield_in_LBO_Models\">Factors That Matter More Than the Interest Tax Shield in LBO Models<\/a><\/li><\/ul><\/nav><\/div>\n\r\n<blockquote class=\"wp-block-quote\">\n<p><strong>Interest Tax Shield Definition:<\/strong> In corporate finance, the \u201cinterest tax shield\u201d refers to the tax reduction a company gets by issuing Debt and paying Interest on that Debt; it is roughly equal to the Interest Expense * Tax Rate, but it may be reduced or limited in certain regions based on the company\u2019s EBIT, EBITDA, or other attributes.<\/p>\n<\/blockquote>\r\n<!-- \/wp:post-content -->\r\n<p>For example, if a company has $1,000 of Debt at a 10% Interest Rate, it pays $100 in Interest Expense per year on the Debt.<\/p>\r\n<p>Since the interest is tax-deductible, its tax burden is reduced by $100 * Tax Rate.<\/p>\r\n<p>In most developed countries, the corporate tax rate is between 20% and 30%, so at a 25% rate, this is a $25 reduction.<\/p>\r\n<p>As a result, the company spends a \u201cnet amount\u201d of $75 rather than $100 due to this tax deduction.<\/p>\r\n<p>Its after-tax profits (<a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/net-income\/\" target=\"_blank\" rel=\"noopener\">Net Income<\/a>) are still down, but they\u2019re down by $75 rather than $100.<\/p>\r\n<p>The interest tax shield should be an organic part of any <a href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/what-is-an-lbo-model\/\" target=\"_blank\" rel=\"noopener\">LBO model<\/a> and does not require a separate schedule in simple cases.<\/p>\r\n<p>You can see it on the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/income-statement\/\" target=\"_blank\" rel=\"noopener\">Income Statement<\/a> in the Pre-Tax Income and Net Income area:<\/p>\r\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31323 size-full\" title=\"Income Statement - Interest Tax Shield\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100636\/01-IS-Interest-Tax-Shield.jpg\" alt=\"Income Statement - Interest Tax Shield\" width=\"1790\" height=\"770\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100636\/01-IS-Interest-Tax-Shield.jpg 1790w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100636\/01-IS-Interest-Tax-Shield-300x129.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100636\/01-IS-Interest-Tax-Shield-1024x440.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100636\/01-IS-Interest-Tax-Shield-768x330.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100636\/01-IS-Interest-Tax-Shield-1536x661.jpg 1536w\" sizes=\"(max-width: 1790px) 100vw, 1790px\" \/><\/p>\r\n<p>In more complex cases, the Interest Expense may not be fully deductible (see the full walkthrough below).<\/p>\r\n<p>So, if we assume that it\u2019s only deductible up to a certain percentage of <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/ebit-operating-income\/\" target=\"_blank\" rel=\"noopener\">Operating Income (EBIT)<\/a>, the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/how-to-calculate-irr-manually\/\" target=\"_blank\" rel=\"noopener\">IRR<\/a> (annualized returns) in the deal decreases.<\/p>\r\n<p>However, since the effect size is small, the IRR remains in a narrow range regardless of the limit:<\/p>\r\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31324\" title=\"Interest Expense - Tax Deduction Limits\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100718\/02-Interest-Tax-Deduction-Limits.jpg\" alt=\"Interest Expense - Tax Deduction Limits\" width=\"500\" height=\"364\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100718\/02-Interest-Tax-Deduction-Limits.jpg 793w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100718\/02-Interest-Tax-Deduction-Limits-300x218.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100718\/02-Interest-Tax-Deduction-Limits-768x559.jpg 768w\" sizes=\"(max-width: 500px) 100vw, 500px\" \/><\/p>\r\n<p>In a DCF-based valuation, the interest tax shield is reflected in the <a href=\"https:\/\/mergersandinquisitions.com\/wacc-formula\/\" target=\"_blank\" rel=\"noopener\">WACC calculation<\/a> because you multiply the company\u2019s Pre-Tax Cost of Debt by (1 \u2013 Tax Rate) for use in the standard formula:<\/p>\r\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31325\" title=\"The Tax Shield in the WACC Calculations\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100740\/03-WACC-Calculation.jpg\" alt=\"The Tax Shield in the WACC Calculations\" width=\"700\" height=\"654\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100740\/03-WACC-Calculation.jpg 1013w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100740\/03-WACC-Calculation-300x280.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100740\/03-WACC-Calculation-768x718.jpg 768w\" sizes=\"(max-width: 700px) 100vw, 700px\" \/><\/p>\r\n<p>The Interest paid on Debt is tax-deductible, which makes Debt even cheaper than Equity.<\/p>\r\n<p>Note, however, that the interest tax shield is only part of the explanation; <a href=\"https:\/\/breakingintowallstreet.com\/kb\/debt-equity\/debt-vs-equity-analysis\/\" target=\"_blank\" rel=\"noopener\">Debt is cheaper than Equity<\/a> mainly because its risks and potential returns are lower.<\/p>\r\n<h3><strong>Files &amp; Resources:<\/strong><\/h3>\r\n<ul>\r\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/109-27-Interest-Tax-Shield-LBO-Model.xlsx\" target=\"_blank\" rel=\"noopener\">Simple LBO Model \u2013 Interest Tax Shield Schedule (XL)<\/a><\/li>\r\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/107-28-Levered-Free-Cash-Flow-Simple-DCF.xlsx\" target=\"_blank\" rel=\"noopener\">Levered and Unlevered FCF Examples with Tax Calculations (XL)<\/a><\/li>\r\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/109-27-Interest-Tax-Shield-Slides.pdf\" target=\"_blank\" rel=\"noopener\">Interest Tax Shield Presentation (PDF)<\/a><\/li>\r\n<\/ul>\r\n<h2><span class=\"ez-toc-section\" id=\"The_Interest_Tax_Shield_in_Valuation_and_DCF_Analysis\"><\/span><strong>The Interest Tax Shield in Valuation and DCF Analysis<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\r\n<p>The main point here was stated above: Always multiply the Pre-Tax Cost of Debt by (1 \u2013 Tax Rate) to get the After-Tax Cost of Debt for use in the WACC calculation.<\/p>\r\n<p>Normally, you estimate a company\u2019s Cost of Debt by calculating the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/debt-equity\/yield-to-maturity\/\" target=\"_blank\" rel=\"noopener\">Yield to Maturity (YTM)<\/a> on its existing bonds, but you could also take the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/finance\/risk-free-rate\/\" target=\"_blank\" rel=\"noopener\">Risk-Free Rate<\/a> and add a Credit Default Spread corresponding to the company\u2019s credit rating.<\/p>\r\n<p>You could even divide the company\u2019s Interest Expense by its average Debt balance, but this is not ideal since it doesn\u2019t reflect current market rates.<\/p>\r\n<p><strong>If you use Unlevered FCF in a traditional DCF, you should NOT factor in any interest tax shield because UFCF is capital structure-neutral. The taxes must be based on the company\u2019s EBIT and ignore the Interest Expense.<\/strong><\/p>\r\n<p>In other words, the Taxes the company pays in the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/discounted-cash-flow-analysis-dcf\/unlevered-free-cash-flow\/\" target=\"_blank\" rel=\"noopener\">UFCF calculations<\/a> stay the same regardless of whether it pays 5%, 10%, or 15% interest on its Debt, and regardless of any deduction limits:<\/p>\r\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31326 size-full\" title=\"Unlevered FCF - Tax Calculation\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100837\/04-Unlevered-FCF-Taxes.jpg\" alt=\"Unlevered FCF - Tax Calculation\" width=\"1449\" height=\"709\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100837\/04-Unlevered-FCF-Taxes.jpg 1449w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100837\/04-Unlevered-FCF-Taxes-300x147.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100837\/04-Unlevered-FCF-Taxes-1024x501.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100837\/04-Unlevered-FCF-Taxes-768x376.jpg 768w\" sizes=\"(max-width: 1449px) 100vw, 1449px\" \/><\/p>\r\n<p>UFCF is capital structure-neutral, so it is not affected by the company\u2019s Debt vs. Equity mix or the specific terms or interest rates on its capital.<\/p>\r\n<p>However, the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/finance\/discount-rate\/\" target=\"_blank\" rel=\"noopener\">Discount Rate<\/a> used in a <a href=\"https:\/\/mergersandinquisitions.com\/dcf-model\/\" target=\"_blank\" rel=\"noopener\">DCF<\/a> \u2013 whether <a href=\"https:\/\/breakingintowallstreet.com\/kb\/discounted-cash-flow-analysis-dcf\/wacc-formula\/\" target=\"_blank\" rel=\"noopener\">the Cost of Equity or WACC<\/a> \u2013 is <em>never<\/em> capital structure-neutral.<\/p>\r\n<p>It changes as the company\u2019s Debt vs. Equity mix, interest rates, and other terms change.<\/p>\r\n<p>Therefore, the Interest Tax Shield affect the output even in an Unlevered DCF because of its impact on WACC.<\/p>\r\n<p>It\u2019s just that it makes a much bigger impact in a <a href=\"https:\/\/breakingintowallstreet.com\/kb\/valuation\/levered-free-cash-flow\/\" target=\"_blank\" rel=\"noopener\">Levered DCF<\/a> since <em>both<\/em> the Free Cash Flow <em>and<\/em> the Discount Rate change there.<\/p>\r\n<div class='code-block code-block-2' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/24164120\/adv-fm-tile.png\" alt=\"PowerPoint Pro\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Master Financial Modeling for Investment Banking With <strong>BIWS Core Financial Modeling<\/strong><\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Become a financial modeling pro<\/h4>\n              <p>158 videos, detailed written guides, Excel files, quizzes, and more<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 10+ detailed global case studies<\/h4>\n            <p>These include both the theory and the practical applications<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Prepare for your internship or full-time job<\/h4>\n            <p>Gain the skills you need to \u201chit the ground running\u201d on Day 1\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/core-financial-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Core-Financial-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div><\/div>\n\r\n<h2><span class=\"ez-toc-section\" id=\"The_Interest_Tax_Shield_in_LBO_Models_and_Deduction_Limits\"><\/span><strong>The Interest Tax Shield in LBO Models and Deduction Limits<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\r\n<p>In a simple LBO model, you do not need to do anything \u201cspecial\u201d or \u201cdifferent\u201d to account for the Interest Tax Shield.<\/p>\r\n<p>If you have set up your model properly, with standard Pre-Tax Income and Net Income calculations, it happens organically:<\/p>\r\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31323 size-full\" title=\"Income Statement - Interest Tax Shield\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100636\/01-IS-Interest-Tax-Shield.jpg\" alt=\"Income Statement - Interest Tax Shield\" width=\"1790\" height=\"770\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100636\/01-IS-Interest-Tax-Shield.jpg 1790w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100636\/01-IS-Interest-Tax-Shield-300x129.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100636\/01-IS-Interest-Tax-Shield-1024x440.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100636\/01-IS-Interest-Tax-Shield-768x330.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100636\/01-IS-Interest-Tax-Shield-1536x661.jpg 1536w\" sizes=\"(max-width: 1790px) 100vw, 1790px\" \/><\/p>\r\n<p>However, some countries <strong>limit<\/strong> the amount of Interest Expense a company can deduct.<\/p>\r\n<p>For example, in the Tax Cuts and Jobs Act (TCJA) passed in the U.S. in 2017, companies could initially deduct Interest Expense only up to 30% * EBITDA.<\/p>\r\n<p>After 2022, this rule shifted to 30% * EBIT, which is much less favorable since <a href=\"https:\/\/breakingintowallstreet.com\/kb\/valuation\/ebit-vs-ebitda\/\" target=\"_blank\" rel=\"noopener\">EBIT is lower than EBITDA<\/a>.<\/p>\r\n<p>It\u2019s a lower deduction limit, which means reduced tax savings from the Interest Expense.<\/p>\r\n<p>Some case studies ask candidates to account for these limits, but they\u2019re uncommon in simpler tests, such as <a href=\"https:\/\/mergersandinquisitions.com\/lbo-modeling-test\/\" target=\"_blank\" rel=\"noopener\">60-minute LBO modeling tests<\/a>.<\/p>\r\n<p>As an example, here\u2019s what happens in this <a href=\"https:\/\/breakingintowallstreet.com\/kb\/leveraged-buyouts-and-lbo-models\/simple-lbo-model-excel\/\" target=\"_blank\" rel=\"noopener\">simple LBO model<\/a> if we allow for Interest Expense deductions up to different percentages of EBIT or EBITDA:<\/p>\r\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31327 size-full\" title=\"Interest Expense - Tax Deduction Limits\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100849\/05-Interest-Deduction-Limits.jpg\" alt=\"Interest Expense - Tax Deduction Limits\" width=\"1809\" height=\"664\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100849\/05-Interest-Deduction-Limits.jpg 1809w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100849\/05-Interest-Deduction-Limits-300x110.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100849\/05-Interest-Deduction-Limits-1024x376.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100849\/05-Interest-Deduction-Limits-768x282.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100849\/05-Interest-Deduction-Limits-1536x564.jpg 1536w\" sizes=\"(max-width: 1809px) 100vw, 1809px\" \/><\/p>\r\n<h2><span class=\"ez-toc-section\" id=\"Factors_That_Matter_More_Than_the_Interest_Tax_Shield_in_LBO_Models\"><\/span><strong>Factors That Matter More Than the Interest Tax Shield in LBO Models<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\r\n<p>Virtually every other assumption matters more than the interest tax shield: The purchase price, the exit multiple, the % debt used, the revenue growth rates, and the operating margins.<\/p>\r\n<p>The interest rate on Debt, such as 5% or 10%, also makes a bigger impact, though it is still less important than the abovementioned assumptions.<\/p>\r\n<p>The Interest Tax Shield affects only the Cash Generated and Debt Repaid during the holding period of an LBO, not the Exit Multiple, Exit EBITDA, or EBITDA Growth.<\/p>\r\n<p>However, in most LBO models, the Cash Generated and Debt Repaid make a small impact next to these other factors:<\/p>\r\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31328 size-full\" title=\"LBO Exit Proceeds and Drivers\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100914\/06-LBO-Exit-Proceeds.jpg\" alt=\"LBO Exit Proceeds and Drivers\" width=\"1790\" height=\"467\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100914\/06-LBO-Exit-Proceeds.jpg 1790w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100914\/06-LBO-Exit-Proceeds-300x78.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100914\/06-LBO-Exit-Proceeds-1024x267.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100914\/06-LBO-Exit-Proceeds-768x200.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100914\/06-LBO-Exit-Proceeds-1536x401.jpg 1536w\" sizes=\"(max-width: 1790px) 100vw, 1790px\" \/><\/p>\r\n<p>Cheaper effective financing improves deal outcomes but is far less significant than the core business growing at different rates.<\/p>\r\n<p>The Interest Tax Shield makes a larger impact when interest rates are much higher, such as 14% rather than 6%:<\/p>\r\n<p><img decoding=\"async\" class=\"aligncenter wp-image-31329 size-full\" title=\"LBO Model - IRR Sensitivities\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100940\/07-LBO-IRR-Sensitivities.jpg\" alt=\"LBO Model - IRR Sensitivities\" width=\"1262\" height=\"565\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100940\/07-LBO-IRR-Sensitivities.jpg 1262w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100940\/07-LBO-IRR-Sensitivities-300x134.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100940\/07-LBO-IRR-Sensitivities-1024x458.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2025\/04\/23100940\/07-LBO-IRR-Sensitivities-768x344.jpg 768w\" sizes=\"(max-width: 1262px) 100vw, 1262px\" \/><\/p>\r\n<p>However, if a company pays a 14% interest rate on its Debt, it is likely a <em>very risky company<\/em> with inconsistent cash flows at a higher risk of financial distress.<\/p>\r\n<p>A company in this category is unlikely to generate much Cash or repay much Debt in the holding period of an LBO model.<\/p>\r\n<p>Therefore, this example is a bit artificial because this scenario would probably not happen in real life.<\/p>\r\n<!-- \/wp:paragraph -->","protected":false},"excerpt":{"rendered":"<p>In corporate finance, the \u201cinterest tax shield\u201d refers to the tax reduction a company gets by issuing Debt and paying Interest on that Debt; it is roughly equal to the Interest Expense * Tax Rate, but it may be reduced or limited in certain regions based on the company\u2019s EBIT, EBITDA, or other attributes.<\/p>\n","protected":false},"featured_media":0,"template":"","class_list":["post-31322","biws_kb","type-biws_kb","status-publish","hentry","kb_category-leveraged-buyouts-and-lbo-models"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/31322","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=31322"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}