This theoretical study presents residual income valuation formulae that account for the firm's credit risk and investors' personal taxation. The formulae can determine optimal financial leverage and the value of accounting based debt covenants. The firm's default may be triggered by breach of...

This note revisits the valuation of the tax shield of corporate borrowing when borrowing is not linked to enterprise value. In this case past literature has typically discounted the tax shield at the cost of borrowed capital gross of corporate tax, not net of corporate tax. Yet the latter often...