Managers should make use of the interest tax shield if the firm has

Question

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The interest tax shield is most beneficial when a firm has consistent taxable income. This allows the firm to consistently deduct interest expenses from its taxable income, thus lowering its taxes payable. If a firm's taxable income is volatile, then the interest tax shield may not be as effective, as interest expenses may not fully offset higher tax liabilities during profitable years. Consistent dividend payments and low tax rates are not directly related to the effectiveness of the interest tax shield.

Managers Should Make Use of the Interest Tax Shield If