If the corporate tax rate is 30% and annual interest expense is $50, what is the annual tax shield?

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Study for the Finance and Investment Challenge Test. Approaches include flashcards and multiple-choice questions with hints and explanations. Ready yourself to ace the exam!

Multiple Choice

If the corporate tax rate is 30% and annual interest expense is $50, what is the annual tax shield?

Explanation:
Tax shields come from deductions that reduce taxable income. The annual tax shield from debt is the tax savings on the interest expense, calculated as tax rate times interest. With a 30% corporate tax rate and $50 of interest, the tax shield is 0.30 × 50 = 15. This means $15 of taxes are saved this year due to the interest deduction. The other numbers would reflect applying different percentages to the interest (e.g., 50 × 0.20 = 10, 50 × 0.40 = 20, 50 × 0.10 = 5), which aren’t the given rate. So the correct amount is 15.

Tax shields come from deductions that reduce taxable income. The annual tax shield from debt is the tax savings on the interest expense, calculated as tax rate times interest. With a 30% corporate tax rate and $50 of interest, the tax shield is 0.30 × 50 = 15. This means $15 of taxes are saved this year due to the interest deduction. The other numbers would reflect applying different percentages to the interest (e.g., 50 × 0.20 = 10, 50 × 0.40 = 20, 50 × 0.10 = 5), which aren’t the given rate. So the correct amount is 15.

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