Managers should make use of the interest tax shield if the firm has:
A)consistent taxable income.
B)volatility in taxable income.
C)consistent dividend payments.
D)low tax rates.
E)many tangible assets.

Question

Quizplus · Accepted Answer

The interest tax shield is the reduction in taxes owed due to the tax-deductibility of interest payments on debt. To make use of the interest tax shield, a firm should have consistent taxable income as fluctuations in income can affect the firm's ability to pay interest expenses. If a firm has consistent taxable income, the interest tax shield will provide a consistent reduction in tax liability, providing a permanent benefit to shareholders. Therefore, managers should make use of the interest tax shield if the firm has consistent taxable income.

Managers Should Make Use of the Interest Tax Shield If