A firm issues debt of $1 million at an interest rate of 10%. If the firm is in the 40% tax bracket, what is the annual tax savings on this debt?

Question

Quizplus · Accepted Answer

The annual interest payment on the debt is $1 million x 10% = $100,000. The annual tax savings on this interest payment is equal to the tax rate multiplied by the interest payment, or 40% x $100,000 = $40,000. Therefore, the correct answer is C. The tax savings on interest payments can be calculated using the formula - Interest paid x Tax rate. Here, the interest paid is $1 million x 10% = $100,000. The tax rate is 40%. So, the tax savings would be $100,000 x 40% = $40,000. Therefore, the correct answer is choice C.

A Firm Issues Debt of $1 Million at an Interest