What formula is used to calculate the permanent riskless debt interest tax shield?

The formula used to calculate the permanent riskless debt interest tax shield is based on the concept that interest expenses on debt are tax-deductible. This tax deductibility provides a tax shield, effectively reducing the amount of taxes a company must pay due to its debt obligations.

The correct answer, which uses the variables representing tax rate (Tc), risk-free rate (rf), and the amount of debt (D), is formulated as follows: The tax shield is calculated by multiplying the tax rate by the interest expense on the debt. In the case of permanent riskless debt, the interest can be represented as the risk-free rate multiplied by the amount of debt, hence forming the formula Tc * rf * D. This captures how much of a tax benefit the company receives from its debt, emphasizing the importance of both the tax rate and the interest that accrues on the riskless debt.

Understanding this formula is crucial for evaluating the financial metrics of a company that utilizes debt in its capital structure and seeks to optimize its tax liabilities.