Abstract
This paper shows that distinguishing between gross and net tax shields arising from interest deductions is important to firm valuation. The distinction affects the interpretation but not valuation of tax shields for the famous Miller (1977) model with corporate and personal taxes. However, for the well-known Miles and Ezzell (1985) model, we show that the valuation of tax shields can be materially affected. Implications to the cost of equity and optimal capital structure are discussed.
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