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

question 58

Multiple Choice

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

• A)$1.36 million
• B)$1.50 million
• C)$1 million
• D)$4.55 million

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Definitions:

Agency Relationships

A legal relationship in which one party (the agent) acts on behalf of another party (the principal) in dealings with third parties.

Third Party

An entity not directly involved in a transaction or agreement but may be affected by it or have an interest in its outcome.

Business Transactions

Financial activities or agreements carried out between parties, often involving the exchange of goods, services, money, or property.

Principal

In a contractual relationship, the principal is the party who authorizes an agent to act on their behalf.