Tax shield refers to a reduction in taxes created by:Group of answer choicesa reduction in sales.opportunity costs.noncash expenses.a project's incremental expenses.an increase in interest expense.
Question
Tax shield refers to a reduction in taxes created by:Group of answer choicesa reduction in sales.opportunity costs.noncash expenses.a project's incremental expenses.an increase in interest expense.
Solution
Tax shield refers to a reduction in taxes created by noncash expenses and an increase in interest expense.
Noncash expenses like depreciation and amortization can reduce a company's taxable income, thus reducing the amount of taxes it has to pay. This is because these expenses are deducted from the company's earnings before it calculates its tax liability.
Similarly, an increase in interest expense can also create a tax shield. When a company borrows money, the interest it pays on the loan is considered a business expense. This expense is deducted from the company's earnings before it calculates its tax liability, thus reducing the amount of taxes it has to pay.
So, the correct answer choices are noncash expenses and an increase in interest expense.
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