Which of the following statements regarding interest tax shields is correct?

Question

Quizplus · Accepted Answer

Interest tax shields refer to the reduction in taxable income resulting from the deduction of interest expenses on a firm's debt. Therefore, option D is the correct statement. Option A is incorrect because taxes are not reduced by the amount of a firm's interest-bearing debt, but instead by the interest expense paid on that debt. Option B is also incorrect because while interest expenses decrease taxable income, they do not reduce taxes directly. Option C is incorrect because it is not the amount of debt that reduces taxes, but only the interest paid on the debt.

Which of the Following Statements Regarding Interest Tax Shields Is