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

Question

Quizplus · Accepted Answer

The tax shield of interest payments for a corporation is based on the marginal corporate tax rate. This is because the tax shield represents the decrease in taxes payable by the corporation as a result of deducting interest expenses from taxable income. The marginal tax rate represents the rate at which the last dollar of taxable income is taxed, so it is the appropriate rate to use for calculating the tax shield. The average corporate tax rate or personal income tax rate are not relevant in this calculation.

In Order to Calculate the Tax Shield of Interest Payments