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

---

Definitions:

Depreciation Expense

The methodical distribution of the expense of a physical asset over its estimated life span.

Prepaid Expenses

Payments made for goods or services to be received in the future; recognized as assets on the balance sheet until the benefit of the goods or services is realized.

Accrued Expenses

Expenses that have been incurred but not yet paid or recorded in the company's financial statements.

Operating Expenses

Operating Expenses are expenditures that a business incurs through its normal business operations, such as salaries, rent, utilities, and equipment depreciation.