The present value of a perpetual tax shield increases as the firm's tax rate _____ and the amount of principal _____.

Question

Quizplus · Accepted Answer

The present value of a perpetual tax shield is calculated as (tax shield amount / cost of capital). As the tax rate increases, the tax shield amount will increase, and as the amount of principal increases, the cost of capital will decrease, both leading to an increase in the present value of the tax shield. Therefore, as the tax rate and amount of principal increase, the present value of the tax shield will increase.

The Present Value of a Perpetual Tax Shield Increases as the Firm's