Interest Tax Shield, MM with Taxes (1963)

Calculates the interest tax shield created by permanent debt and the resulting levered firm value under Modigliani-Miller with corporate taxes. Inputs are the unlevered firm value, the amount of permanent debt, and the corporate tax rate.

Interactive Tool

Unlevered value (V_U)

Permanent debt (D)

Corporate tax rate (Tc)

Levered value (V_L)

$86M

V_U + Tc × D

Interest tax shield

$6M

Tc × D

Value uplift

7.9%

shield ÷ V_U

Because interest is tax-deductible and dividends are not, debt shields income and adds value equal to Tc × D. This is the first real argument for debt, but it is worth nothing to a startup with no taxable income to shield.

Learn the concept

This calculator comes from the free Entrepreneurial Finance course, where the concept is taught with readings, worked examples, and practice questions.

Open Entrepreneurial Finance

Built by Devon Coombs, CPA, MBA, Teaching Professor of Finance at Santa Clara University.