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Valuation of Interest Tax Shields

In: Encyclopedia of Finance

Author

Listed:
  • Michael Dothan

    (Willamette University)

Abstract

Assessing financing effects, such as tax benefits of debt, is an important part of financial analysis and valuation. This chapter describes the frameworks and valuation formulas of Modigliani-Miller, Miles-Ezzell, modified Miles-Ezzell, Modigliani-Miller with growth, Fernandez, and other related setups. In addition, the chapter examines recent dynamic models that value interest tax shields in the context of flexible financing strategies. The chapter starts with two summary tables that list notation, definitions, and formulas for some discrete-time valuation models. Because of the diversity of views on the appropriate discount rate for interest tax shields, I present a short derivation of the Miles-Ezzell formula. The last part of the chapter reviews recent dynamic valuation models of interest tax shields, including the application of barrier options to analyzing the effects of flexible financing strategies, and presents a summary that compares the valuation outcomes of the various models.

Suggested Citation

  • Michael Dothan, 2022. "Valuation of Interest Tax Shields," Springer Books, in: Cheng-Few Lee & Alice C. Lee (ed.), Encyclopedia of Finance, edition 0, chapter 71, pages 1641-1656, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-91231-4_71
    DOI: 10.1007/978-3-030-91231-4_71
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