In order to calculate the tax shield of interest payments for a corporation, always use the:
I.average corporate tax rate;
II.marginal corporate tax rate;
III.marginal rate on personal income tax
A)I only
B)II only
C)III only
D)I and III only

Question

Quizplus · Accepted Answer

The tax shield of interest payments is calculated by multiplying the amount of interest payment by the marginal corporate tax rate. The marginal tax rate is the rate at which the last dollar of income is taxed. Therefore, we use the marginal corporate tax rate as it represents the tax rate on the incremental earnings of the corporation. The average corporate tax rate is not suitable as it does not take into account the tax rate on incremental earnings. The marginal rate on personal income tax is not relevant in this context as it is not applicable to corporations.

In Order to Calculate the Tax Shield of Interest Payments