Tax Structure and Debt PolicyOne of the major reason of taking debt is to get the tax benefit which significantly reduce the interest expense due to its tax deductibility. It is logical to say a higher debt will induce higher tax savings. Though it is contradictory to MMs proposition 2 which tells us that taking higher debt shareholders will not be better off because of financial risk. However the tax shield makes the difference. Such tax savings increase the firms value since the interest expense become lower.Table 1: Tax structure of different companiesCompaniesTax

Publicly Traded Company27.5%

Non-publicly Traded Company37.5%

Bank, Insurance & Financial Company (Except merchant bank)42.5%

Merchant bank37.5%

Cigarette manufacturing company45%

Publicly traded cigarette company45%

Mobile Phone Operator Company45%

Publicly traded mobile company45%

Table 1 shows the marginal tax of different companies. According to trade off theory company should use such a debt equity ratio which will provide the highest tax shield with the lowest financial distress. It will be wise to think the company with higher tax bracket will use higher debt to enjoy higher tax benefit but in real world despite of higher tax bracket so many companies choose not to use higher debt e.g. BATBC which is not using any debt but the company is performing better with higher EPS.