In order to calculate the tax shield effect of interest payment for a corporation, always use the:
I. average corporate tax rate
II. marginal corporate tax rate
III. state mandated tax rate
A) I only
B) II only
C) III only
D) I and III only

Question

Quizplus · Accepted Answer

The tax shield effect of interest payment is based on the marginal corporate tax rate, which is the rate at which the next dollar of income would be taxed. The average corporate tax rate does not take this into account and may not accurately reflect the tax savings from interest payments. State mandated tax rates are not relevant for calculating the tax shield effect of interest payments.

In Order to Calculate the Tax Shield Effect of Interest