Interest tax shield applies to levered ﬁrms but not to unlevered ﬁrms.

Question

Quizplus · Accepted Answer

Interest tax shield refers to the tax deduction on interest payments made by a company to its debt holders. This tax deduction reduces the amount of taxes the company has to pay, resulting in a lower cost of debt for the company. Therefore, only levered firms with debt financing benefit from the interest tax shield, while unlevered firms that use only equity financing do not.

Interest Tax Shield Applies to Levered ﬁRms but Not to Unlevered