If a Firm Issues an Additional $1 Million in Debt

question 29

Multiple Choice

If a firm issues an additional $1 million in debt at an interest rate of 12% and pays taxes at a marginal rate of 35%, the present value of the corporate income tax avoided, assuming the debt
Is perpetual is

• A)$120,000.
• B)$350,000.
• C)$78,000.
• D)none of the above.

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Definitions:

Fixed Cost

Costs that do not vary with the level of output or business activity, such as rent, salaries, and insurance premiums.

Average Fixed Cost

The fixed costs of production divided by the quantity of output produced, representing how fixed costs dilute as more units are produced.

Variable Costs

Costs that vary directly with the level of production or business activity, such as materials and labor used in the production of goods.

Fixed Costs

Costs that do not vary with the level of output or sales in the short term, such as rent, salaries, or loan payments.