Annual tax saving benefit of the company = debt income × tax rate

Company's annual tax-saving income = debt income × tax rate = company's debt scale D × company's debt capital return rate (i.e. company's debt capital cost) KD× tax rate T If the company's debt is permanent, then the company will have an equal tax-saving income flow every year, and the present value of this uncertain equal capital flow is the added value of the indebted enterprise. The added value of indebted enterprises is: D×T is the present value of tax-saving income of equal liabilities. Proposition 2: Considering income tax, the cost rate of equity capital (KSL) of indebted enterprises is equal to the cost rate of equity capital (KSU) of debt-free enterprises with the same risk level plus a certain risk return rate. The risk return rate is determined according to the difference between the debt capital cost rate (KD) and the debt equity ratio of the debt-free enterprise. The formula is: on the basis of the proposition 1, the risk reward considers the influence of income tax. Because (1-t) is always less than l, this risk-return ratio is always less than the risk-return ratio in Proposition 2 without tax under the condition that the D/S ratio is constant. Due to the income from tax saving, the increase of the cost ratio of shareholders' equity capital is small at this time, or, under tax conditions, when the debt ratio rises, the risk reward required by shareholders facing financial risks is less than that under tax exemption conditions, that is, the company allows a larger debt scale under tax conditions.