The interest tax shield has no value for a firm when:
I. the tax rate is equal to zero.
II. the debt-equity ratio is exactly equal to 1.
III. the firm is unlevered.
IV. a firm elects 100% equity as its capital structure.
A) I and III only
B) II and IV only
C) I, III, and IV only
D) II, III, and IV only
E) I, II, and IV only

Question

Quizplus · Accepted Answer

I is correct as the interest tax shield is based on tax deductions on interest paid, so if the tax rate is zero, there is no value to the tax shield. 
III is correct as an unlevered firm has no debt and thus no tax shield. 
IV is correct as an all-equity firm has no debt and thus no interest expense and no tax shield. 
II is incorrect, as a debt-equity ratio of 1 would indicate equal amounts of debt and equity, which would still result in interest expenses and tax shields.

The Interest Tax Shield Has No Value for a Firm