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Rethinking capital structure today?

Rethinking capital structure today?

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With potential tax reform in the air, many senior decision-makers wonder whether they should revisit their capital structures.

Although specifics are not yet known, a number of scenarios—including a lower tax rate, loss of interest deductibility and a one-time or ongoing lower tax rate on offshore earnings—could motivate decision-makers to fine-tune their strategy in search of the right capital structure.

What does this mean for your company? As you consider potential outcomes, there are a number of questions that may influence your strategy.

How important are taxes to capital structure?

Lower or no interest tax shields and access to global free cash flow could impact capital structure choices. For instance, a lower tax rate reduces the tax shield on debt while the loss of interest deductibility eliminates it entirely. Given interest deductibility is one of the key drivers of the cost of capital curve, such potential changes could impact decision making.

But are tax shields the key determinant of capital structure?

Tax savings are just one of many factors, and perhaps not even the most important, in determining capital structure decisions.

Even with the loss of a tax shield, debt will remain much ‘cheaper’ than equity.

Across sectors and country, firms with low corporate tax rates and fewer tax shields do not have less leverage.

Companies often target specific credit ratings because they provide more secure access to the debt markets.

Our report explores why and how such drivers impact capital structure decision making, and why their presence may limit the impact of potential tax reform.

So what can I do next?

Being proactive is key. As executives wait for specifics around tax reform, we encourage a proactive approach – employing the measures below – as they evaluate various scenarios.

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