Which of the following is the best deﬁnition of interest tax shield?
A) The tax saving attained by a ﬁrm from interest expense.
B) Termination of the ﬁrm as a going concern.
C) The value of the ﬁrm is independent of its capital structure.
D) A ﬁrm's cost of equity capital is a positive linear function of its capital structure.
E) Financial restructuring of a failing ﬁrm to attempt to continue operations as a going concern.

Question

Quizplus · Accepted Answer

Interest tax shield refers to the tax saving that a firm attains from deducting its interest expense from its taxable income. This deduction reduces the amount of taxable income, leading to a lower tax bill for the firm. Therefore, the best definition of interest tax shield is option A.

Which of the Following Is the Best Deﬁnition of Interest