Purpose: The purpose of this paper is to show that distinguishing between gross and net tax shields arising from interest deductions is important to firm valuation. The distinction affects the interpretation but not valuation of tax shields for the famous Miller’s (1977) model with corporate...

The now‐famous work of Modigliani and Miller (MM) (1) asserted that firms should prefer to use debt over equity in financing assets. That prescription holds that there exists realisable value in the tax deductibility of interest payments. The deductibility benefit lowers the cost of debt with...