Sand Mountain Resort has a 45% tax rate. Its total interest payment for the year just ended was...

Question:

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?

A $3,006,500

B $3,060,000

C $3,410,600

D $3,525,000

E $3,618,000

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.


Learn more about this topic:

Loading...
How to Calculate Interest Expense: Formula & Example

from Financial Accounting: Help and Review

Chapter 5 / Lesson 18
37K

Related to this Question

Explore our homework questions and answers library