Josh, this seems right to me. Note in the following example if the interest rate were increased by 5%, the profits gained from leveraging would be halved.
>From Medoff and Harless, The Indebted Economy:
one of the best ways to avoid taxes on profits is to avoid profits. Consider fro example a hypothetical firm worth $1M with 100,000 shares of stock outstanding (each share is worth $10). The firm makes $200K, per year in pretax profits that are taxed at 50%, netting an after tax profit of $100K. This leaves each shareholder with a share of profits valued at $1, or a t 10 percent return on the $10 share value. Now suppose the company borrows $500K at a 10 percent interest rate. The firm uses this money to buy back half its outstanding shares at market value of $10. To service the loan the firm must now pay $50K per year to its creditors--leaving a pretax profit of $150,000. Taxed at the 50 percent tax rate, the firm is left with $75K in after tax profit. Since there are now only 50,000 shares outstanding, each shareholder realizes a profit of $1.50, or a t 15% return on the original $10 stock value. This seemingly magic formula is called leveraging." p. 30
In this example, if interest rates goes up to 15%, then return only goes from 10% to 12.5%, not 15%. Josh, is this what you had in mind about how about interest rate hikes could matter?
Yours, Rakesh