Question

Taxallergy, a typical Belgian Accounting Consulting firm has a 22% tax rate. Its total interest payment for the year just ended was $14,3 million. What is the interest tax shield? How do you interpret this amount?

Answer 1

Total interest payment = $14,300,000

Tax rate = 22%

Interest tax shield = $14,300,000 * 22% = $3,146,000

Interest tax shield refers to the reduction in the tax liability, due to the interest cost. Thus interest expenses acts as a Shield against the tax obligations.

Actual interest expense = $14,300,000 Due to the tax rate of 22%, the net interest cost to the firm will be ($14,300,000 - $3,146,000) which is $11,154,000.

So, Debt obligation helped the Firm to save $3,146,000