If a Firm Borrows $50 Million for One Year at an Interest

question 34

Multiple Choice

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

• A)$1.36 million
• B)$1.50 million
• C)$1.00 million
• D)$4.55 million

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Definitions:

Inventory Turnover

This is a ratio showing how many times a company's inventory is sold and replaced over a period, usually a year, indicating the efficiency of inventory management.

Current Ratio

A liquidity ratio that measures a company's ability to cover its short-term obligations with its current assets.

Quick Ratio

A measure of a company's ability to meet its short-term obligations with its most liquid assets, excluding inventory.

Interest-Burden Ratio

A financial metric that shows how much of a company's income is consumed by interest expenses.