Sand Mountain Resort has a 45% tax rate. Its total interest payment for the year just ended was $6.8 million.
What is the interest tax shield?
Interest Tax Shield:
ITS refers to a reduction in the company's tax liability due to the deduction of the company's interest expense. Interest is paid on borrowings made by the company and it facilitates a tax deduction. Because of this feature, debt financing is lucrative after a certain level of equity financing.
Answer and Explanation:
The Interest tax shield is calculated as Interest x Tax rate.
We know that the interest rate is 45% and the interest payment amount for the previous year is $6.8 million.
Substituting the values in the formula, we get
Interest tax shield = $6.8 M x 0.45 = $3.06 million
Option B is correct.
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from Financial Accounting: Help and ReviewChapter 5 / Lesson 18