Abstract
The purpose of this paper is to investigate the interest tax deductibility effect on cost of capital under earning stripping rules recalling Modigliani-Miller’s theorem (1958, 1963). In fact, Italy’s corporate taxation, as other countries, does not allow to fully deduct interest expenses of debt but it imposes a threshold by linking the interest tax deductibility to the ebitda driver. This limit could reduce the tax shield benefit for firms with higher financial leverage, creating a misconception about optimal capital structure and firm value. The findings have led to an adjustment of the weighted average cost of capital (WACC) formula analysing the single and multi-period analysis by which in both cases the limitation is irrelevant in terms of optimal capital structure decision and firm value.
Published Version
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