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For year 20X1, Zero Motorcycles earns $30MM of EBIT. If the firm's tax rate is...

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Finance

For year 20X1, Zero Motorcycles earns $30MM of EBIT. If the firm's tax rate is 25% and it pays 10% interest on $100MM of debt. How would you best explain the "tax shield" effect on Zero's interest expense?image

For year 20X1, Zero Motorcycles earns $30MM of EBIT. If the firm's tax rate is 25% and it pays 10% interest on $100MM of debt. How would you best explain the "tax shield" effect on Zero's interest expense? Although Zero's Interest Expense is $10MM, this is not a cash expense, so it does not impact the firm's bottom line. Although Zero's Interest Expense is $10MM, it has $100M loan proceeds that it does not pay tax on. Not enough information is provided to answer this question. Although Zero's Interest Expense is $10MM, the effect of this expense on the firm's NI is just 75% of this or $7.5MM. Although Zero's Interest Expense is $10MM, the effect of this expense on the firm's NI is just 70% of this or $7MM

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