Tax shield
The tax saving that arises because interest on debt reduces taxable profit while dividends do not.
Formula
\text{Shield} = \text{Interest} \times tt is the profit tax rate as a fraction of one. The shield only works where there is profit for that tax to be paid from.
How to read the number
Part of the benefit of debt financing: the same headline rate costs the company less than its face value.
When the metric lies
With a loss the shield does not work, and unused interest is carried forward neither always nor in full. For a loss-making company the advantage of debt is absent.
Also known as: interest tax shield