What Is an Interest Tax Shield?

The income investors receive from the tax deduction of interest payments is called the interest tax shield.

Interest tax shield

Right!

The income investors receive from the tax deduction of interest payments is called the interest tax shield.

Chinese name

Interest tax shield

Concept

Gains from tax deductions for interest payments

formula?

Cash flow of non-leveraged companies + interest tax shield

Maintain

Interest tax shield at target debt to equity ratio

Interest tax shield = corporate income tax rate × interest expense

Annual interest tax shield = income tax rate multiplied by interest expense

Formulas related to the interest tax shield ?? (1) Cash flow of a leveraged company = Cash flow of an unlevered company + interest tax shield

(2) The value of the leveraged enterprise VL = the value of the unleveraged enterprise VU + PV (interest tax shield)-PV (financial distress cost financial distress cost)

(3) Interest tax shield when maintaining the target debt to equity ratio

= Leveraged Enterprise Value-Unlevered Enterprise Value

= Corporate value discounted with weighted average cost of capital after tax-corporate value discounted with weighted average cost of capital before tax