If a Firm Permanently Borrows $100 Million at an Interest

question 1

Multiple Choice

If a firm permanently borrows $100 million at an interest rate of 8%, what is the present value of the interest tax shield? (Assume that the tax rate is 30%)

• A) $8.00 million
• B) $5.6 million
• C) $30 million
• D) $26.67 million
• E) None of the above

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Definitions:

Liabilities Reporting

The process of disclosing a company's obligations and debts on its financial statements.

Revenues Test

A criterion used to assess whether revenues are being recognized in the correct accounting period under the accrual basis of accounting.

Operating Segment

A component of a business that engages in business activities earning revenues and incurring expenses, whose operating results are regularly reviewed by the organization's chief operating decision maker.

Separate Disclosures

Financial reporting that requires specific financial statements or items to be presented separately to provide clarity and detail.