Question

The tax shield afforded by debt will be of the least use to firms with _______

O high levels of debt
O losses carried forward
O negative EBT
O high N.I

Answer 1

The tax shield from debt is least beneficial for firms with losses carried forward because these firms can already offset their taxable income, rendering the shield redundant.

Step-by-step explanation:

The tax shield afforded by debt will be of the least use to firms with losses carried forward.

A tax shield is the reduction in income taxes that a firm achieves due to allowable deductions from its taxable income. For a company with debt, the interest payments on that debt are deductible expenses, which can lower the firm's taxable income and thus its tax liability. However, for firms with losses carried forward, this advantage is minimal or non-existent.

These firms have accumulated losses from previous periods that can be used to offset taxable income in the current period. If the firm's losses exceed its income before taxes (EBT), it won't owe any income taxes and therefore would not benefit from additional deductions due to interest payments.