The Interest Tax Shield Has No Value When a Firm

question 38

Multiple Choice

The interest tax shield has no value when a firm has a:
I.tax rate of zero.
II.debt-equity ratio of 1.
III.zero debt.
IV.zero leverage.

• A)I and III only
• B)II and IV only
• C)I, III, and IV only
• D)II, III, and IV only
• E)I, II, and IV only

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Definitions:

Fixed Costs

Costs that do not change with the level of production or sales over a certain period.

Volume Of Activity

A measure of the total amount of work performed or output produced in a specific period.

Margin Of Safety

Margin of safety is the difference between actual or projected sales and the sales level at which the business breaks even.

Contribution Margin

The amount by which a product's selling price exceeds its total variable costs, indicating how much contributes to covering fixed costs and generating profit.