Which of the following will tend to diminish the beneﬁt of the interest tax shield given a progressive tax rate structure? I. A reduction in tax rates.
II) A large tax loss carry forward.
III) A large depreciation tax deduction.
IV) A sizeable increase in taxable income.
A)I and II only.
B)I and III only.
C)II and III only.
D)I, II, and III only.
E)I, II, III, and IV.

Question

Quizplus · Accepted Answer

I, II, and III will tend to diminish the benefit of the interest tax shield in a progressive tax rate structure. A reduction in tax rates (I) directly reduces the tax shield's value. A large tax loss carryforward (II) means the company may not owe taxes against which to shield. A large depreciation tax deduction (III) can also reduce taxable income, diminishing the shield's value. A sizeable increase in taxable income (IV) would not diminish the benefit of the interest tax shield; it could actually increase it by providing more income against which to shield.

Which of the Following Will Tend to Diminish the Beneﬁt