The benefit of an interest tax shield is captured by the equity holders.

Question

Quizplus · Accepted Answer

The interest tax shield refers to the tax savings that a company can enjoy due to deducting interest expense from its taxable income. This benefit goes to the equity shareholders because it increases the after-tax profits and hence, the value of the firm. Debt-holders, on the other hand, do not directly benefit from the interest tax shield as they receive predetermined interest payments regardless of the tax savings.

The Benefit of an Interest Tax Shield Is Captured by the Equity