Green Tea House has a 35 percent tax rate and an interest tax shield valued at $6,728 for the...

Question:

Green Tea House has a 35 percent tax rate and an interest tax shield valued at $6,728 for the year. How much did the firm pay in annual interest?

a. $2,153

b. $2,304

c. $2,468

d. $19,107

e. $19,223

Interest Tax Shield

The answer is E.

Interest Tax Shield is the savings that a firm can earn on the total tax liability due to the effect of interest expenses. Alternatively, interest expenses will be deducted from the earnings before interests and tax and that will lower the taxable income, which causes to decrease the tax obligation as well.

Answer and Explanation:

Tax rate = 35%

Interest Tax Shield = 6,728

{eq}Interest\:Tax\:Shield = Interest\:Expenses\times Tax\:Rate{/eq}

{eq}6,728 = Interest\:Expenses\times 35\%{/eq}

{eq}==> Interest\:Expenses = \frac{6,728}{35\%}= 19,223{/eq}


Learn more about this topic:

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How to Calculate Interest Expense: Formula & Example

from Financial Accounting: Help and Review

Chapter 5 / Lesson 18
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