The benefit of an interest tax shield is captured by the equity holders, not the debtholders.

Question

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The interest tax shield is the reduction in tax liability that comes from deducting interest payments from taxable income. As interest payments are a deductible expense, the tax shield reduces the amount of taxable income and therefore reduces the amount of taxes owed. This benefit is captured by the equity holders, as they are the ones who are paying taxes on the profits of the company. Debtholders, on the other hand, do not pay taxes on the profits of the company, so they do not capture this benefit.

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