What does the present value of the tax shield from debt formula assume?
A)The interest rate on the debt is less than cost of equity.
B)The debt will not be replaced when paid.
C)Interest on the debt is paid only when the debt matures.
D)The interest is paid semiannually.
E)The debt is perpetual.

Question

Quizplus · Accepted Answer

The present value of the tax shield from debt formula assumes that the debt is perpetual, meaning that it has no maturity or repayment date. This allows for a continuing tax shield on the interest payments. The other options mentioned (A, B, C, and D) are not assumptions made in the formula.

What Does the Present Value of the Tax Shield from Debt