CFA Level I · CFA Level I Exam · Capital Structure
A firm has a marginal tax rate of 25% and currently has debt of 400 at a 6% interest rate. Under the static trade-off theory, the firm's annual interest tax shield is closest to:
The annual interest tax shield is about 6. Interest is 400 × 6% = 24, and multiplying by the 25% tax rate gives 6. The figure of 24 is the interest expense itself, not the tax saving.
- A6Correct
- B24
- C100
Explanation
Interest = 400 × 6% = 24. Tax shield = 24 × 25% = 6. Option 24 is the interest expense, ignoring the tax rate. Option 100 is the debt times the tax rate, ignoring the interest rate.
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