Gross and Net Tax Shield Valuation
19 Pages Posted: 20 Dec 2017 Last revised: 10 Jan 2019
Date Written: December 15, 2017
This paper shows that distinguishing between gross and net tax shields arising from interest deductions is important to firm valuation. The distinction affects the interpretation but not valuation of tax shields for the famous Miller (1977) model with corporate and personal taxes. However, for the well-known Miles and Ezzell (1985) model, we show that the valuation of tax shields can be materially affected. Implications to the cost of equity and optimal capital structure are discussed.
Keywords: Tax Shields, Share Valuation, Firm Valuation, Capital Structure
JEL Classification: G12, G31, G32
Suggested Citation: Suggested Citation