Question

a corporation gains no value from an interest tax shield if which of the following are true? multiple select question. the corporation is an all-equity firm. the debt-equity ratio is 1. corporate tax rates are zero. the corporation has no debt.

Answer 1

A corporation would gain no value from an interest tax shield if it is an all-equity firm, has no debt, or if corporate tax rates are zero. Without debt, there's no interest to deduct, and with zero tax rates, there's no tax liability to reduce.

Step-by-step explanation:

A corporation gains no value from an interest tax shield if certain conditions apply. An interest tax shield is a reduction in taxable income that results from a corporation's ability to deduct interest payments on its debt. This tax deduction reduces the corporation's tax liability, effectively making debt less costly.

The scenarios in which a corporation would not benefit from an interest tax shield are:

• The corporation is an all-equity firm, meaning it has no debt obligations from which it could deduct interest payments.
• The corporation has no debt on its balance sheet. Interest can only be deducted if there is actual indebtedness with associated interest payments.
• Corporate tax rates are zero. If taxes are not being paid, there is no tax liability from which to shield.

Hence, in these cases, the corporation would not experience the financial advantage typically afforded by an interest tax shield.