All else the same, which of the following is true about the interest tax shield of a firm with positive EBIT?
A) The higher the corporate tax rate, the less valuable the interest tax shield.
B) If the firm dramatically increases its depreciation expense, it may have more of a need for an interest tax shield.
C) The interest tax shield becomes more valuable as the size of the debt load increases.
D) The interest tax shield increases as a firm reduces its level of outstanding debt.
E) Since the interest tax shield is valuable, the firm would rather pay a high coupon rate on its bonds than a low coupon rate.

Question

Quizplus · Accepted Answer

The interest tax shield refers to the tax savings achieved by a firm through the deduction of interest payments on its debt from its earnings before taxes. The value of the interest tax shield increases as the firm takes on more debt, because the interest payments that can be deducted from taxable income increase, thereby reducing the firm's tax liability.

All Else the Same, Which of the Following Is True