Calculate the Annual Value of an Interest Tax Shield Under

question 115

Essay

Calculate the annual value of an interest tax shield under the assumption that a firm maintains debt at a permanent $1,000,000 level and rate of 12%.The corporate tax rate is 35%.If there is no chance of financial distress,how does the value of the firm change as a result of this debt?

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Definitions:

Output Level

The amount of output produced by a firm or an industry within a certain period.

Demand Curve

An illustrated diagram indicating how consumer demand for a product varies with changes in its price.

Output Quantity

The amount of goods or services produced by a company, industry, or economy within a specific period.

MR = MC Rule

The principle that a firm will maximize its profit (or minimize its losses) by producing the output at which marginal revenue and marginal cost are equal, provided product price is equal to or greater than average variable cost.