The benefit to the firm of the tax deductibility of interest can be lowered if the firm's marginal tax rate is reduced by accumulated depreciation or tax-loss carry-forwards.

Question

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When a firm has accumulated depreciation or tax-loss carry-forwards, its taxable income is reduced, thereby lowering its marginal tax rate. This reduces the benefit the firm receives from tax-deductible interest.

The Benefit to the Firm of the Tax Deductibility of Interest