Quantifying the Interest Tax Shield for Different Investors in South Africa

The Interest Tax Shield has long been accepted in capital structure literature. In this study, the authors challenge the notion of the tax advantage of debt through scenario analyses from the perspective of different investors. The findings indicate that the tax advantage of debt can range from 28c per Rand of earnings, to a disadvantage of 4c per Rand of earnings, in other words, an advantage of equity. Companies could potentially optimise weighted average cost of capital through an understanding of tax consequences for investors. Investors could potentially improve their risk and return balance through using the optimal investment vehicle.