In order to calculate the tax shields provided by debt, the tax rate used is the
A)average corporate tax rate.
B)marginal corporate tax rate.
C)average of shareholders' equity tax rates.
D)average of bondholders' personal tax rates.

Question

Quizplus · Accepted Answer

The tax shield of debt is computed by multiplying the amount of interest paid on the debt by the marginal corporate tax rate. The marginal tax rate is the tax rate that is applicable to the next dollar of taxable income earned by the corporation, and it effectively measures the tax impact of an incremental dollar earned.

In Order to Calculate the Tax Shields Provided by Debt