The interest tax shield has no value when a firm has:
I.no taxable income.
II.debt-equity ratio of 1.
III.zero debt.
IV.no leverage.

Question

Quizplus · Accepted Answer

The interest tax shield is the reduction in taxes payable due to deductible interest expenses. If a firm has no taxable income or no debt, there is no interest expense to deduct, and thus, no benefit from the interest tax shield. Also, if the firm has no leverage or a debt-equity ratio of 1, then there is no incremental benefit from additional debt financing.

The Interest Tax Shield Has No Value When a Firm