Reformulating Tax Shield Valuation

A Note

James Alan Miles, JOHN R. EZZELL

Research output: Contribution to journalComment/debate

63 Citations (Scopus)

Abstract

Standard financial theory (in the absence of agency costs and personal taxes) implies that each dollar of debt contributes to the value of the firm in proportion to the firm's tax rate. To derive this result, incremental debt is assumed permanent. This paper shows that when the firm acts to maintain a constant market value leverage ratio, the marginal value of debt financing is much lower than the corporate tax rate. Since Hamada's [2] unlevering procedure for observed equity betas was derived under the assumption of permanent debt, we derive an unlevering procedure consistent with the assumption of a constant leverage ratio. 1985 The American Finance Association

Original languageEnglish (US)
Pages (from-to)1485-1492
Number of pages8
JournalThe Journal of Finance
Volume40
Issue number5
DOIs
StatePublished - Jan 1 1985

Fingerprint

Debt
Tax shield
Leverage ratio
Debt financing
Market value
Incremental
Equity
Corporate tax rates
Marginal value
Personal taxes
Finance
Agency costs
Proportion
Tax rate

All Science Journal Classification (ASJC) codes

  • Accounting
  • Economics and Econometrics
  • Finance

Cite this

Miles, James Alan ; EZZELL, JOHN R. / Reformulating Tax Shield Valuation : A Note. In: The Journal of Finance. 1985 ; Vol. 40, No. 5. pp. 1485-1492.
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Reformulating Tax Shield Valuation : A Note. / Miles, James Alan; EZZELL, JOHN R.

In: The Journal of Finance, Vol. 40, No. 5, 01.01.1985, p. 1485-1492.

Research output: Contribution to journalComment/debate

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