Question

Sand Mountain Resort has a 45% tax rate. Its total interest payment for the year just ended was $6.8 million. What is the interest tax shield?

A. $3,006,500
B. $3,060,000
C. $3,410,600
D. $3,525,000
E. $3,618,000

Answer 1

The interest tax shield of Sand Mountain Resort is calculated as the total interest payments multiplied by the tax rate, which is $6,800,000 × 0.45, resulting in $3,060,000. So, answer B is the correct choice.

Step-by-step explanation:

The question involves calculating the interest tax shield for Sand Mountain Resort, which has a total interest payment of $6.8 million and a tax rate of 45%.

The interest tax shield is a deduction that companies get on their taxable income due to interest payments on debt.

The interest tax shield can be calculated using the formula:

Interest Tax Shield = Interest Payments × Tax Rate

In this case:

Interest Tax Shield = $6,800,000 × 0.45

This gives us an interest tax shield of:

Interest Tax Shield = $3,060,000

Therefore, the correct answer is B. $3,060,000.