What Is the Amount of the Annual Interest Tax Shield

question 81

Multiple Choice

What is the amount of the annual interest tax shield for a firm with $5 million in debt that pays 10% interest if the firm is in the 40% tax bracket?

• A)$100,000
• B)$200,000
• C)$300,000
• D)$400,000 Interest tax shield = interest expense x tax rate
• = $5,000,000 x .1 x .40

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Definitions:

Transfer Price

The price at which goods, services, or intellectual property are traded between divisions within the same company or between related entities.

Outside Market

External markets or trading environments that influence the supply, demand, and pricing of goods or services.

Ample Capacity

A situation where a company or facility has enough resources, often production capability or space, to meet current or future demand without strain.

Allocation Bases

Allocation bases are criteria or standards used to distribute costs among different departments, products, or activities in a fair and logical manner.