Free calculator · Corporate Finance
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.
By Devon Coombs, CPA, MBA · Teaching Professor of Finance, Santa Clara University · Reviewed August 2026
From the author: Devon Coombs, CPA, MBA teaches finance at Santa Clara University and works with corporate teams on practical AI.
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Interest Tax Shield, MM with Taxes (1963)
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.
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