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The present value of a perpetual tax shield increases as the firm's tax rate ________ and as the amount of the debt ________. a. increases; increases b. increases; decreases c. decreases; decreases d.
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The present value of a perpetual tax shield increases as the firm's tax rate ________ and as the amount of the debt ________.

a. increases; increases
b. increases; decreases
c. decreases; decreases
d. decreases; increases

User Zorrocaesar
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1 Answer

5 votes

Answer:

B

Step-by-step explanation:

The value of tax shield is simply given as corporate tax rate times the cost of debt times the market value of debt.

If the debt is constant and perpetual, the company’s tax shield depends only on the corporate tax rate and the value of debt. Then the present value of tax shield equals the discounted value of debt

User Wolfram
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