Question

The interest tax shield is best defined as:

Multiple Choice

• A.Financial restructuring of a failing firm to attempt to continue operations as a going concern.

• B.Termination of the firm as a going concern.

• C.The tax saving attained by a firm from interest expense.

• D.The value of the firm is independent of its capital structure.

• E.A firm's cost of equity capital is a positive linear function of its capital structure.

Answer 1

The interest tax shield is best defined as :-

Answer :- ( C ) the tax savings attained by a firm from interest expense .

Explanation :-

Interest expense are paid out of operating profits ( EBIT ) before any payment of taxes . So, the amount paid as interest expense reduces the taxable income . So, less amount of tax has to be paid . In this way, interest expense helps in attaining tax savings . So, interest tax shield is the tax savings attained by interest expense of a firm

All other options given are not in any way related to interest tax shield .

So, the right option is option ( C ) .