Reformulating Tax Shield Valuation: A Note

James Alan Miles, JOHN R. EZZELL

Research output: Contribution to journalComment/debatepeer-review

74 Scopus citations


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
Issue number5
StatePublished - Jan 1 1985

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics


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