Listen in MM proposition topic it says that Vl=Vu + tax shield and tax shield= value of debt * tax rate which does not make sense because tax shield should be interest payments * tax rate
tax shield = value of debt * (1-Tax).
cp how come that be the amount of tax that u save is the interest payment that u r able to deduct from your income. for example if i can deduct 100 dollar interest payment before calculating tax then ur saving is 100 * tax rate is that not tax shield and it makes logical sense? what is the logic behind the formula u mentioned
The value of the tax shield is the value of the debt multiplied by the tax rate. You shouldn’t include this when valuing a firm because it a cost that is incurred by the government.