Reformulating Tax Shield Valuation: A Note

  • Author(s): JAMES A. MILES, JOHN R. EZZELL
  • Published: Apr 30, 2012
  • Pages: 1485-1492
  • DOI: 10.1111/j.1540-6261.1985.tb02396.x

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.

Jump to menu

Main Navigation

Search the Site / Journal

Search Keywords

Search Tips

Members' Login

Credentials

Members' Options

Site Footer

View Mobile Version