If a Firm Borrows $50 Million for One Year at an Interest

question 13

Multiple Choice

If a firm borrows $50 million for one year at an interest rate of 9 percent, what is the present value of the interest tax shield? Assume a 21 percent marginal corporate tax rate.

• A)$50.00 million
• B)$17.50 million
• C)$1.45 million
• D)$0.87 million

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Definitions:

Short-term Finance

Financing options intended for a period typically less than one year, used to address immediate operational needs.

Interest Expense

The cost incurred by an entity for borrowed funds over a period of time.

Operating Cycle

The time period between the purchase of inventory and the collection of accounts receivable from the sale of that inventory.

Current Asset Accounts

Balance sheet accounts that represent resources with value owned by a company, expected to be converted into cash or used within a year.