If a Firm Permanently Borrows $50 Million at an Interest

question 68

Multiple Choice

If a firm permanently borrows $50 million at an interest rate of 10%, what is the present value of the interest tax shield? Assume a 30% tax rate.

• A) $50.0 million
• B) $25.0 million
• C) $15.0 million
• D) $1.5 million

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Definitions:

Disposable Income

The amount of money a household or individual has available to spend or save after taxes have been deducted.

Government Expenditure

The total amount of money spent by the government on various services and investments.

Discretionary Fiscal Policy

Government policy that involves altering government spending and taxation to influence the economy, based on current economic conditions.

Automatic Stabilizers

Structural features of government spending and taxation that reduce fluctuations in disposable income, and thus consumption, over the business cycle.