The interest tax shield has no value when a firm has a:
I.tax rate of zero.
II.debt-equity ratio of 1.
III.zero debt.
IV.zero leverage.
A)I and III only
B)II and IV only
C)I, III, and IV only
D)II, III, and IV only
E)I, II, and IV only

Question

Quizplus · Accepted Answer

The interest tax shield is the tax reduction that a company receives as a result of deducting interest expenses from taxable income. Therefore, it only has value when a company has taxable income and interest expenses to deduct. 
I - If a firm has a tax rate of zero, then there is no tax to be reduced, and therefore, there is no value in the interest tax shield.
II - A debt-equity ratio of 1 indicates that the company has an equal amount of debt and equity in its capital structure. This does not necessarily mean that the company does not have interest expenses to deduct, so the interest tax shield could still have some value.
III - If a company has zero debt, then it has no interest expenses to deduct, and therefore, there is no value in the interest tax shield.
IV - If a company has zero leverage, it means that it has no debt to deduct interest expenses from, and therefore, there is no value in the interest tax shield.

The Interest Tax Shield Has No Value When a Firm