How is the tax benefit per year from debt calculated?

How is the tax benefit per year from debt calculated?

• A. Debt amount multiplied by equity cost and taxable income
• B. Debt amount multiplied by interest rate and corporate tax rate
• C. Equity amount divided by interest rate
• D. Debt amount plus interest rate minus tax liabilities

Answer: (B)

The tax benefit per year from debt is calculated by multiplying the amount of debt by the interest rate and the corporate tax rate. This reflects the deductibility of interest expenses from taxable income, which provides a tax shield. When a company incurs debt, it pays interest on that debt. This interest payment is typically tax-deductible, providing a reduction in the company's taxable income. The formula effectively captures the financial advantage of using debt as a source of funding. By multiplying the debt amount by the interest rate, you find the total interest expense, and then multiplying by the corporate tax rate gives the tax savings resulting from that interest expense. For example, if a company has a debt of $1,000,000, an interest rate of 5%, and a corporate tax rate of 30%, the tax benefit would be calculated as follows: $1,000,000 (debt) * 5% (interest rate) * 30% (tax rate) = $15,000. This indicates that the company saves $15,000 in taxes annually due to the interest expense associated with its debt. The other options do not correctly reflect the calculation of tax benefits from debt financing. Some elaborate on irrelevant calculations or attributes that do not pert

The tax benefit per year from debt is calculated by multiplying the amount of debt by the interest rate and the corporate tax rate. This reflects the deductibility of interest expenses from taxable income, which provides a tax shield.

When a company incurs debt, it pays interest on that debt. This interest payment is typically tax-deductible, providing a reduction in the company's taxable income. The formula effectively captures the financial advantage of using debt as a source of funding. By multiplying the debt amount by the interest rate, you find the total interest expense, and then multiplying by the corporate tax rate gives the tax savings resulting from that interest expense.

For example, if a company has a debt of $1,000,000, an interest rate of 5%, and a corporate tax rate of 30%, the tax benefit would be calculated as follows: $1,000,000 (debt) * 5% (interest rate) * 30% (tax rate) = $15,000. This indicates that the company saves $15,000 in taxes annually due to the interest expense associated with its debt.

The other options do not correctly reflect the calculation of tax benefits from debt financing. Some elaborate on irrelevant calculations or attributes that do not pert