Salinas Corporation Has Net Income of $15 Million Per Year

question 16

Multiple Choice

Salinas Corporation has net income of $15 million per year on net sales of $90 million per year.It currently has no long-term debt,but is considering a debt issue of $20 million.The interest rate on the debt would be 7%.Salinas Corp.currently faces an effective tax rate of 40%.What would be the annual interest tax shield to Salinas Corp.if it goes through with the debt issuance?

• A) $560,000
• B) $1,400,000
• C) $8,000,000
• D) $20,000,000

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Definitions:

Human Capital Investment

Spending on education, training, health, and other personal capacities that improve an individual's productivity and quality of life.

Short Run

A time period in which at least one factor of production is fixed, limiting the ability of firms to adjust to market changes.

Long Run

A period in which all factors of production and costs are variable, allowing full industry adjustment.