Managers Should Make Use of the Interest Tax Shield If

question 6

Multiple Choice

Managers should make use of the interest tax shield if a firm has ________.

• A) consistent taxable income
• B) volatility in taxable income
• C) consistent dividend payments
• D) low tax rates

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Definitions:

Plowback Ratio

Also known as the retention rate, it measures the proportion of earnings that a company retains and reinvests in its operations rather than paying out as dividends.

Debt-equity Ratio

The ratio that exhibits the financing divide between debt and equity for company assets.

Sustainable Growth Rate

The maximum rate at which a company can grow its revenues and earnings without increasing financial leverage, often calculated using ROE and the dividend payout ratio.

Shareholders' Equity

Shareholders' Equity is the residual interest in the assets of a corporation after deducting its liabilities, essentially representing ownership equity.