Paying Interest Reduces the Taxes Owed by a Firm

question 34

Multiple Choice

Paying interest reduces the taxes owed by a firm.Which one of the following terms applies to this relationship?

• A)Static theory of interest rates
• B)M&M Proposition I
• C)Financial risk
• D)Interest tax shield
• E)Homemade leverage

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Definitions:

Relevant Range

The extent of activity or volume over which the specific cost assumptions and behaviors are considered valid.

Opportunity Cost

The cost of forgoing the next best alternative when making a decision, representing potential benefits that are missed.

Contribution Margin

The difference between a product's selling price and its total variable costs, which helps cover fixed costs and create profit.

Net Operating Income

The profit generated from a company's core business operations, excluding deductions for interest and taxes.