A Firm Has Interest Expense of $2 500 Each Year

question 18

Multiple Choice

A firm has interest expense of $2 500 each year for 10 years. If the tax rate is 30% and the discount rate is 7%, compute the value of the interest rate tax shield.

• A)$5 744
• B)$5 268
• C)$5 918
• D)$6 987

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Definitions:

Cumulative Preferred Stock

A type of preferred stock that entitles the shareholder to receive dividends that were missed in the past before any dividends are paid to common stock shareholders.

Capital Stock

The total amount of shares that a corporation is authorized to issue as stated in its articles of incorporation.

Dividend

A portion of a company's earnings distributed to its shareholders.

Cumulative Preferred Stock

A type of preferred stock where dividends accumulate if not paid, and must be paid out before dividends to common stockholders.