Question

A company has net income of $20,000 and a tax rate of 35 percent. Its total debt is $25,000, with principal payments of $5,000 due at the end of each year and an annual interest rate of 8%. What will be the company's interest tax shield in the upcoming year?

Answer 1

Answer:

Company's tax shield in the upcoming year is $700

Explanation:

We know that the annual interest rate is 8%, the tax rate is 35% and that the total debt is  $25,000.

We then take the annual interest rate and multiply it by the total debt

Interest expenses = 0.08*$25000 = $2000

 We finally take the interest expense and multiply it by the tax rate

Tax shield on interest = $2000*0.35 = $700