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' tax rates
D) average of bondholders' tax rates

Question

Quizplus · Accepted Answer

The marginal corporate tax rate is the rate at which the company's next dollar of taxable income will be taxed. This rate is used because it is the most relevant tax rate for determining the tax benefits of debt financing.

In Order to Calculate the Tax Shields Provided by Debt