Any financial benefit derived from the interest tax shield accrues to the:
A) Bondholders.
B) Shareholders.
C) bondholders and shareholders, equally.
D) shareholders and the federal government.

Question

Quizplus · Accepted Answer

The interest tax shield results from the deductibility of interest expense on corporate taxes. This tax benefit reduces the amount of taxes the firm pays, resulting in increased profits. As shareholders own the company and are entitled to its profits, they are the ones who benefit from the interest tax shield. Bondholders do not directly benefit from the interest tax shield as their returns are fixed and do not depend on the firm's profits.

Any Financial Benefit Derived from the Interest Tax Shield Accrues