What Is the Amount of the Annual Interest Tax Shield

question 66

Multiple Choice

What is the amount of the annual interest tax shield for a firm with $3 million in debt that pays 12% interest if the firm is in the 35% tax bracket?

• A) $126,000
• B) $234,000
• C) $360,000
• D) $1,050,000

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Definitions:

Collection Float

The time gap between when a check is deposited into a bank account and when the funds become available.

Opportunity Cost

Opportunity cost refers to the potential benefits an individual, investor, or business misses out on when choosing one alternative over another.

Net Float

The difference between checks written against and deposited in an account and those that have been cleared and charged against the account.

Short-term Investments

Financial assets that are expected to be converted into cash or sold within a short timeframe, usually one year or less.