In order to find the present value of the tax shields provided by debt, the discount rate used is the:
A) cost of capital
B) cost of equity
C) cost of debt
D) none of the above

Question

Quizplus · Accepted Answer

The cost of debt is the appropriate discount rate to use in order to calculate the present value of tax shields provided by debt. This is because the tax shields provided by debt are directly related to the interest expense of the debt, and the cost of debt reflects the required return on debt financing. Therefore, using the cost of debt as the discount rate ensures that the present value calculation accurately reflects the value of the tax shields provided by the debt.

In Order to Find the Present Value of the Tax