Taxes, Capital Structure Choices, and Equity Value

What is it about?

While firm value decreases with corporate tax rate increases, financial leverage mitigates this effect due to its interest deductibility. The value of debt tax savings is greater among top tax payers, highly profitable firms, and in countries where tax laws are more strongly enforced.

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Why is it important?

The findings are important because they show the effect of debt financing on firm value through the tax savings from interest deduction. This helps managers make financing decisions especially at profitable firms and in countries with strict tax laws.