公司理财（英文版·第5版）课件 第15章　债务和税收

CorporateFinanceFifthEditionChapter15DebtandTaxesCopyright©2020,2017,2014PearsonEducation,Inc.

AllRightsReservedChapterOutline15.1

TheInterestTaxDeduction15.2

ValuingtheInterestTaxShield15.3

RecapitalizingtoCapturetheTaxShield15.4

PersonalTaxes15.5OptimalCapitalStructurewithTaxesLearningObjectives(1of3)Explaintheeffectofinterestpaymentsoncashflowstoinvestors.Calculatetheinteresttaxshield,giventhecorporatetaxrateandinterestpayments.Calculatethevalueofaleveredfirm.Calculatetheweightedaveragecostofcapitalwithcorporatetaxes.Describetheeffectofaleveragedrecapitalizationonthevalueofequity.LearningObjectives(2of3)Describetheeffectofpersonaltaxesonthecorporatetaxbenefitsofleverage.Givencorporateandpersonaltaxratesonequityanddebt,calculatethetaxbenefitofdebtwithpersonaltaxes.Discusswhytheoptimallevelofleveragefromatax-savingperspectiveisthelevelatwhichinterestequalsE

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T.LearningObjectives(3of3)Describetherelationshipbetweentheoptimalfractionofdebtandthegrowthrateofthefirm.Assesstheapparentunder-leveragingofcorporations,bothdomesticallyandinternationally.15.1TheInterestTaxDeduction(1of5)Corporationspaytaxesontheirprofitsafterinterestpaymentsarededucted.Thus,interestexpensereducestheamountofcorporatetaxes.Thiscreatesanincentivetousedebt.15.1TheInterestTaxDeduction(2of5)ConsiderMacy’s,whichhadearningsbeforeinterestandtaxesofapproximately$2.8billionin2014andinterestexpensesofabout$400million.Macy’smarginalcorporatetaxratewas35%Asshownonthenextslide,Macy’snetincomein2014waslowerwithleveragethanitwouldhavebeenwithoutleverage.Table15.1Macy’sIncomewithandWithoutLeverage,FiscalYear2014($million)BlankWithLeverageWithoutLeverageEBITInterestexpense$2800minus400$28000IncomebeforetaxTaxes(35%)2400minus8402800minus980Netincome$1560$182015.1TheInterestTaxDeduction(3of5)Macy’sdebtobligationsreducedthevalueofitsequity.Butthetotalamountavailabletoallinvestorswashigherwithleverage.BlankWithLeverage

WithoutLeverageInterestpaidtodebtholders

Incomeavailabletoequityholders400156001820Totalavailabletoallinvestors$1960$182015.1TheInterestTaxDeduction(4of5)Withoutleverage,Macy’swasabletopayout$1820millionintotaltoitsinvestors.Withleverage,Macy’swasabletopayout$1960millionintotaltoitsinvestors.Wheredoestheadditional$140millioncomefrom?15.1TheInterestTaxDeduction(5of5)InterestTaxShieldThereductionintaxespaidduetothetaxdeductibilityofinterestInMacy’scase,thegainisequaltothereductionintaxeswithleverage:TheinterestpaymentsprovidedataxsavingsofTextbookExample15.1(1of2)ComputingtheInterestTaxShieldProblemShownbelowisthepro-formaforecastedincomestatementforD.FBuilders(D

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B),Givenitsmarginalcorporatetaxrateof25%,whatistheamountoftheinteresttaxshieldforD

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Binyear2019through2022?DFBIncomestatement($million)2019202020212022TotalsalesCostofsalesSelling,general,andadministrativeexpenseDepreciation$3369minus2359minus22minus226$3706.negative2584.negative25.negative248.$4077minus2867minus27minus276$4432minus3116minus29minus299OperatingincomeOtherincome762784989071098812EBITInterestexpense769minus50857−80917minus1001000minus100IncomebeforetaxTaxes(35%)719minus180777minus194817minus204900minus225Netincome$539$583$613$675TextbookExample15.1(2of2)SolutionFromEq.15.1,theinteresttaxshieldisthetaxrateof25%multipliedbytheinterestpaymentsineachyear:($million)2012201320142015Interestexpenseminus50minus80minus100minus100Interesttaxshield(25%×interestexpense)12.5202525Thus,theinteresttaxshieldenabledD

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Btopayanadditional$82.5milliontoitsinvestorsoverthisperiod.AlternativeExample15.1(1of2)ProblemForthemostrecentfiscalyear,Texasfieldhad$5.35millionininterestexpense.Ifthefirm’smarginaltaxrateis30%,whatisthevalueoftheinteresttaxshieldforTexasfieldinthemostrecentfiscalyear?AlternativeExample15.1(2of2)SolutionTheinteresttaxshieldforthemostrecentfiscalyearis

15.2ValuingtheInterestTaxShieldWhenafirmusesdebt,theinteresttaxshieldprovidesacorporatetaxbenefiteachyear.Thisbenefitisthecomputedasthepresentvalueofthestreamoffutureinteresttaxshieldsthefirmwillreceive.TheInterestTaxShieldandFirmValue(1of2)ThecashflowsaleveredfirmpaystoinvestorswillbehigherthantheywouldbewithoutleveragebytheamountoftheinteresttaxshieldFigure15.1TheCashFlowsoftheUnleveredandLeveredFirmTheInterestTaxShieldandFirmValue(2of2)MMPropositionIwithTaxesThetotalvalueoftheleveredfirmexceedsthevalueofthefirmwithoutleverageduetothepresentvalueofthetaxsavingsfromdebt:TextbookExample15.2(1of2)ValuingtheInterestTaxShieldWithoutRiskProblemSupposeDFBrestructuresitsexistingdebt,andwillinsteadpay$80millionininteresteachyearforthenext10years,andthenrepaytheprincipalof$1.6billioninyear10.Thesepaymentsareriskfree,andDFB’smarginaltaxratewillremain25%throughoutthisperiod.Iftherisk-freeinterestrateis5%,byhowmuchdoestheinteresttaxshieldincreasethevalueofDFB?TextbookExample15.2(2of2)SolutionInthiscase,theinteresttaxshieldismillioneachyearforthenext10years.Therefore,wecanvalueitasa10-yearannuity.Becausethetaxsavingsareknownandnotrisky,wecandiscountthematthe5%risk-freerate:Thefinalrepaymentofprincipleinyear10isnotdeductible,soitdoesnotcontributetothetaxshield.AlternativeExample15.2(1of2)ProblemSupposeA

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Oplanstopay$60millionininteresteachyearforthenexteightyears,andthenrepaytheprincipalof$1billioninyear8.Thesepaymentsareriskfree,andA

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O’smarginaltaxratewillremain39%throughoutthisperiod.Iftherisk-freeinterestrateis6%,byhowmuchdoestheinteresttaxshieldincreasethevalueofA

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O?AlternativeExample15.2(2of2)SolutionTheannualinteresttaxshieldis

millionforeightyears.TheInterestTaxShieldwithPermanentDebt(1of4)Typically,theleveloffutureinterestpaymentsisuncertainduetochangesinthemarginaltaxrate,theamountofdebtoutstanding,theinterestrateonthatdebt,andtheriskofthefirm.Forsimplicity,wewillconsiderthespecialcaseinwhichtheabovevariablesarekeptconstant.TheInterestTaxShieldwithPermanentDebt(2of4)SupposeafirmborrowsdebtDandkeepsthedebtpermanently.Ifthefirm’smarginaltaxrateisandifthedebtisrisklesswitharisk-freeinterestratethentheinteresttaxshieldeachyearisandthetaxshieldcanbevaluedasaperpetuity:TheInterestTaxShieldwithPermanentDebt(3of4)Ifthedebtisfairlypriced,noarbitrageimpliesthatitsmarketvaluemustequalthepresentvalueofthefutureinterestpayments:TheInterestTaxShieldwithPermanentDebt(4of4)Ifthefirm’smarginaltaxrateisconstant,thenTheWeightedAverageCostofCapitalwithTaxesWithtax-deductibleinterest,theeffectiveafter-taxborrowingrateisandtheweightedaveragecostofcapitalbecomesFigure15.2TheWACCwithandWithoutCorporateTaxesTheInterestTaxShieldwithaTargetDebt-EquityRatio(1of2)Whenafirmadjustsitsleveragetomaintainatargetdebt-debt-equityratio,wecancomputeitsvaluewithleverage,bydiscountingitsfreecashflowusingtheweightedaveragecostofcapital.TheInterestTaxShieldwithaTargetDebt-EquityRatio(2of2)Thevalueoftheinteresttaxshieldcanbefoundbycomparingthevalueoftheleveredfirm,totheunleveredvalue,ofthefreecashflowdiscountedatthefirm’sunleveredcostofcapital,thepretaxWACC.TextbookExample15.3(1of3)ValuingtheInterestTaxShieldwithaTargetDebt-EquityRatioProblemWesternLumberCompanyexpectstohavefreecashflowinthecomingyearof$4.25million,anditsfreecashflowisexpectedtogrowatarateof4%peryearthereafter.WesternLumberhasanequitycostofcapitalof10%andadebtcostofcapitalof6%,anditpaysacorporatetaxrateof21%.IfWesternLumbermaintainsadebt-equityratioof0.50,whatisthevalueofitsinteresttaxshield?TextbookExample15.3(2of3)SolutionWecanestimatethevalueofwesternLumber’sinteresttaxshieldbycomparingitsvaluewithandwithoutleverage.WecomputeitsunleveredvaluebydiscountingitsfreecashflowatitspretaxW

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C:BecausewesternLumber’sfreecashflowisexpectedtogrowataconstantrate,wecanvalueitasaconstantgrowthperpetuity:TocomputewesternLumber’sleveredvalue,wecalculateitsW

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C:TextbookExample15.3(3of3)Thus,WesternLumber’svalueincludingtheinteresttaxshieldisThevalueoftheinteresttaxshieldisthereforeAlternativeExample15.3(1of5)ProblemHarrisSolutionsexpectstohavefreecashflowinthecomingyearof$1.75million,anditsfreecashflowisexpectedtogrowatarateof3.5%peryearthereafter.HarrisSolutionshasanequitycostofcapitalof12%andadebtcostofcapitalof7%,anditpaysacorporatetaxrateof40%.IfHarrisSolutionsmaintainsadebt-equityratioof2.5,whatisthevalueofitsinteresttaxshield?AlternativeExample15.3(2of5)SolutionWecanestimatethevalueofHarrisSolution’sinteresttaxshieldbycomparingitsvaluewithandwithoutleverage.WecomputeitsunleveredvaluebydiscountingitsfreecashflowatitspretaxW

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C:AlternativeExample15.3(3of5)SolutionBecauseHarrisSolution’sfreecashflowisexpectedtogrowataconstantrate,wecanvalueitasaconstantgrowthperpetuity:AlternativeExample15.3(4of5)SolutionTocomputeHarrisSolution’sleveredvalue,wecalculateitsW

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C:AlternativeExample15.3(5of5)SolutionThus,HarrisSolution’svalueincludingtheinteresttaxshieldisThevalueoftheinteresttaxshieldistherefore:15.3RecapitalizingtoCapturetheTaxShieldAssumethatMidcoIndustrieswantstoboostitsstockprice.Thecompanycurrentlyhas20millionsharesoutstandingwithamarketpriceof$15pershareandnodebt.Midcohashadconsistentlystableearningsandpaysa21%taxrate.Managementplanstoborrow$100milliononapermanentbasis,andtheywillusetheborrowedfundstorepurchaseoutstandingshares.TheTaxBenefit(1of3)Withoutleverage

​IfMidcoborrows$100millionusingpermanentdebt,thepresentvalueofthefirm’sfuturetaxsavingsis

TheTaxBenefit(2of3)Thusthetotalvalueoftheleveredfirmwillbe​Becausethevalueofthedebtis$100million,thevalueoftheequityis​TheTaxBenefit(3of3)Althoughthevalueofthesharesoutstandingdropsto$221million,shareholderswillalsoreceivethe$100millionthatMidcowillpayoutthroughthesharerepurchase.Intotal,theywillreceivethefull$321million,againof$21millionoverthevalueoftheirshareswithoutleverage.TheShareRepurchase(1of3)AssumeMidcorepurchasesitssharesatthecurrentpriceof$15pershare.Thefirmwillrepurchase6.67millionshares.Itwillthenhave13.33millionsharesoutstanding.TheShareRepurchase(2of3)Thetotalvalueofequityis$221million;therefore,thenewsharepriceis$16.575pershare.Shareholderswhokeeptheirsharesearnacapitalgainof$1.575pershare.TheShareRepurchase(3of3)Thetotalgaintoshareholdersis$21million.​Ifthesharesareworth$16.575pershareaftertherepurchase,whywouldshareholderstendertheirsharestoMidcoat$15pershare?NoArbitragePricing(1of4)Ifinvestorscouldbuysharesfor$15immediatelybeforetherepurchaseandsellthesesharesimmediatelyafterwardatahigherprice,thiswouldrepresentanarbitrageopportunity.NoArbitragePricing(2of4)Realistically,thevalueoftheMidco’sequitywillriseimmediatelyfrom$300millionto$321millionaftertherepurchaseannouncement.With20millionsharesoutstanding,thesharepricewillriseto$16.05pershare.NoArbitragePricing(3of4)Witharepurchasepriceof$16.05,theshareholderswhotendertheirsharesandtheshareholderswhoholdtheirsharesbothgain$1.05pershareasaresultofthetransaction.NoArbitragePricing(4of4)Thebenefitoftheinteresttaxshieldgoestoall20millionoftheoriginalsharesoutstandingforatotalbenefitof$21million.Whensecuritiesarefairlypriced,theoriginalshareholdersofafirmcapturethefullbenefitoftheinteresttaxshieldfromanincreaseinleverage.TextbookExample15.4(1of3)AlternativeRepurchasePricesProblemSupposeMidcoannouncesapriceatwhichitwillrepurchase$100millionworthofitsshares.Showthat$16.05isthelowestpriceitcouldofferandexpectshareholderstotendertheirshares.HowwillthebenefitsbedividedifMidcooffersmorethan$16.05pershare?TextbookExample15.4(2of3)SolutionForeachrepurchaseprice,wecancomputethenumberofsharesMidcowillrepurchase,aswillasthenumberofsharesthatwillremainafterthesharerepurchase.Dividingthe$221milliontotalvalueofequitybythenumberofremainingsharesgivesMidco’snewsharepriceafterthetransaction.Noshareholderswillbewillingtoselltheirshareunlesstherepurchasepriceisatleastashighasthesharepriceafterthetransaction.Noshareholderswillbewillingtoselltheirsharesunlesstherepurchasepriceisatleastashighasthesharepriceafterthetransaction;otherwise,theywouldbebetteroffwaitingtoselltheirshares.Asthetableshow,therepurchasepricemustbeatleast$16.05forshareholderstobewillingtosellratherthenwaitingtoreceiveahigherprice.TextbookExample15.4(3of3)Repurchaseprice($/share)ShareRepurchase(million)SharesRemaining(million)NewSharePrice($/share)PsubRR=100overPsubRN=20minusRPsubN=221overN15.006.6713.33$16.5815.556.4313.5716.2916.056.2313.7716.0516.556.0413.9615.8317.055.8714.1315.64IfMidcooffersapriceabove$16.05,thenallexistingshareholderswillbeeagertoselltheirshares,becausetheshareswillhavealowervalueafterthetransactioniscompleted.Inthiscase,Midco’soffertorepurchaseshareswillbeoversubscribedandMidcowillneedtousealotteryorsomeotherrationingmechanismtochoosefromwhomitwillrepurchaseshares.Inthatcase,moreofthebenefitsoftherecapwillgototheshareholderswhoareluckyenoughtobeselectedfortherepurchase.AlternativeExample15.4(1of2)ProblemSupposeMidcostillchoosestoborrow$100million,butwishestorepurchase$125millionworthofitsshares.Whatisthelowestpriceitcouldofferandexpectshareholderstotendertheirshares?AlternativeExample15.4(2of2)SolutionRepurchasePriceSharesRepurchased(millions)SharesRemaining(millions)NewSharePricePsubRR=startfraction125overPsubRendfractionN=20minusRPsubN=startfraction221overNendfraction$16.307.6712.33$17.92$16.557.5512.45$17.66$16.807.4412.56$17.60$17.057.3312.67$17.44$17.307.2312.77$17.30$17.557.1212.88$17.16$17.807.0212.98$17.03AnalyzingtheRecap:TheMarketValueBalanceSheetInthepresenceofcorporatetaxes,wemustincludetheinteresttaxshieldasoneofthefirm’sassets.Table15.2MarketValueBalanceSheetfortheStepsinMidco’sLeveragedRecapitalization15.4PersonalTaxes(1of2)Thecashflowstoinvestorsaretypicallytaxedtwice.Onceatthecorporatelevelandtheninvestorsaretaxedagainwhentheyreceivetheirinterestordividedpayment.15.4PersonalTaxes(2of2)ForindividualsInterestpaymentsreceivedfromdebtaretaxedasincome.Equityinvestorsalsomustpaytaxesondividendsandcapitalgains.IncludingPersonalTaxesintheInterestTaxShield(1of4)Theamountofmoneyaninvestorwillpayforasecuritydependsonthecashflowstheinvestorwillreceiveafteralltaxeshavebeenpaid.Personaltaxesreducethecashflowstoinvestorsandcanoffsetsomeofthecorporatetaxbenefitsofleverage.IncludingPersonalTaxesintheInterestTaxShield(2of4)Theactualinteresttaxshielddependsonbothcorporateandpersonaltaxesthatarepaid.Todeterminethetruetaxbenefitofleverage,thecombinedeffectofbothcorporateandpersonaltaxesneedstobeevaluated.Figure15.3After-TaxInvestorCashFlowsResultingfrom$1inEBITTable15.3TopFederalTaxRatesintheUnitedStates,1971–2018*Interestincomeistaxedasordinaryincome.Until2003,dividendswerealsotaxedasordinaryincome.Theaveragetaxrateonequityincomeisanaverageofdividendandcapitalgaintaxrates(consistentwitha50%dividendpayoutratioandannualrealizationofcapitalgains),wherethecapitalgaintaxrateisthelong-termrateapplicabletoassetsheldmorethanoneyear.Since2013,someinvestorsarealsosubjecttoanadditional3.8%netinvestmentincometaxonbothinterestandequityincome.†ThecorporaterateshownisforCcorporationswiththehighestlevelofincome.Marginalratescanbehigherforlowerbrackets.(Forexample,between2000and2017,the35%taxrateappliedtoincomelevelsabove$18.3million,whilethetaxrateforincomelevelsbetween$100,000and$335,000was39%.)IncludingPersonalTaxesintheInterestTaxShield(3of4)Ingeneral,every$1receivedaftertaxesbydebtholdersfrominterestpaymentscostsequityholdersonanafter-taxbasis,whereEffectiveTaxAdvantageofDebtIncludingPersonalTaxesintheInterestTaxShield(4of4)WhentherearenopersonaltaxesondebtincomeorwhenthepersonaltaxratesondebtandequityincomearethesametheformulareducestoWhenequityincomeistaxedlessheavilythenTextbookExample15.5(1of2)CalculatingtheEffectiveTaxAdvantageofDebtProblemWhatwastheeffectivetaxadvantageofdebtin1980?In1990?TextbookExample15.5(2of2)SolutionUsingEquation15.7andthetaxratesintable15.3,wecancalculateGiventhetaxratesatthetime,theeffectivetaxadvantageofdebtwasmuchlowerin1980thanin1990.AlternativeExample15.5(1of2)ProblemGiventhefollowingtaxrates:YearCorporateTaxRateAveragePersonalTaxRateonEquityIncomeAveragePersonalTaxRateonInterestIncome198546%35%50%199535%34%28%200935%15%35%Whatistheeffectivetaxadvantageofdebtforeachoftheyearslisted?AlternativeExample15.5(2of2)SolutionFigure15.4TheEffectiveTaxAdvantageofDebtwithandWithoutPersonalTaxes,1971–2020ValuingtheInterestTaxShieldwithPersonalTaxes(1of3)Withpersonaltaxesandpermanentdebt,thevalueofthefirmwithleveragebecomesIfthebenefitofleverageisreducedinthepresenceofpersonaltaxes.ValuingtheInterestTaxShieldwithPersonalTaxes(2of3)Personaltaxeshaveasimilareffectonthefirm’sweightedaveragecostofcapital.However,westillcomputetheW

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CasValuingtheInterestTaxShieldwithPersonalTaxes(3of3)Withpersonaltaxes,thefirm’sequityanddebtcostsofcapitalwilladjusttocompensateinvestorsfortheirrespectivetaxburdens.ThenetresultisthatapersonaltaxdisadvantagefordebtcausestheW

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Ctodeclinemoreslowlywithleveragethanitotherwisewould.TextbookExample15.6(1of2)EstimatingtheInterestTaxShieldwithPersonalTaxesProblemMoreLevInc.currentlyhasamarketcapof$500millionwith40millionsharesoutstanding.MoreLevexpectstopaya21%corporatetaxrate.Itestimatesthatitsmarginalcorporatebondholderpaysa20%taxrateoninterestpayments,whereasitsmarginalequityholderpaysonaveragea10%taxrateonincomefromdividendsandcapitalgains.MoreLevplanstoaddpermanentdebt.Basedonthisinformation,estimateMoreLev’ssharepriceaftera$220millionleveragedrecap.TextbookExample15.6(2of2)SolutionAlternativeExample15.6(1of2)ProblemEstimatethevalueofMidcoifitgoesthroughwiththe$100millionrecapitalization,accountingforpersonaltaxesattheir1980levels.AlternativeExample15.6(2of2)SolutionFromexample15.5,weknowin1980was8.2%.GivenMidco’scurrentvalueofisestimatedasWith20millionoriginalsharesoutstanding,thestockpricewouldincreasebyDeterminingtheActualTaxAdvantageofDebt(1of7)Aswehaveseen,theeffectivetaxadvantageofdebtcriticallydependsuponthetaxtreatmentofinvestmentincomeforinvestors.Inourestimationofwehavethusfarfocusedoninvestorsinthetoptaxbracket.However,itisunlikelythatall,orevenmost,investors’investmentincomeisactuallytaxedatthehighestrate.DeterminingtheActualTaxAdvantageofDebt(2of7)Itwasassumedthatinvestorspaidcapitalgainstaxeseveryyear.However,capitalgainstaxesarepaidonlywhentheinvestorsellsthestockandrealizesthegain.Deferringthepaymentofcapitalgainstaxeslowersthepresentvalueofthetaxes,whichcanbeinterpretedasalowereffectivecapitalgainstaxrate.DeterminingtheActualTaxAdvantageofDebt(3of7)Investorswithaccruedlossesthattheycanusetooffsetgainsfaceazeroeffectivecapitalgainstaxrate.Thus,investorswithlongerholdingperiodsorwithaccruedlossesfacealowertaxrateonequityincome,decreasingtheeffectivetaxadvantageofdebt.DeterminingtheActualTaxAdvantageofDebt(4of7)Itwasalsoassumedthatthatshareholdergainsfromadditionalearningswereevenlysplitbetweendividendsandcapitalgains.Forfirmswithmuchhigherormuchlowerpayoutratios,however,thisaveragewouldnotbeaccurate.DeterminingtheActualTaxAdvantageofDebt(5of7)Itwasassumedthatinvestorspaythetopmarginalfederalincometaxrates.Inreality,ratesvaryforindividualinvestors,andmanyinvestorsfacelowerrates.Atlowerrates,theeffectsofpersonaltaxesarelesssubstantial.DeterminingtheActualTaxAdvantageofDebt(6of7)ManyinvestorsfacenopersonaltaxesForexample,investmentsheldinretirementsavingsaccountsorpensionfundsthatarenotsubjecttotaxes.Fortheseinvestors,theeffectivetaxadvantageofdebtisthefullcorporatetaxrate.DeterminingtheActualTaxAdvantageofDebt(7of7)ThebottomlineCalculatingtheeffectivetaxadvantageofdebtaccuratelyisextremelydifficult.Afirmmustconsiderthetaxbracketofitstypicaldebtholders,andthetaxbracketandholdingperiodofitstypicalequityholders.Thetaxadvantageofdebtwillvaryacrossfirmsandfrominvestortoinvestor.15.5OptimalCapitalStructurewithTaxes(1of3)DoFirmsPreferDebt?Whenfirmsraisenewcapitalfrominvestors,theydosoprimarilybyissuingdebt.Inmostyears,aggregateequityissuesarenegative,meaningthatonaverage,firmsarereducingtheamountofequityoutstandingbybuyingshares.Figure15.5NetExternalFinancingandCapitalExpendituresbyU.S.Corporations,1975–2017Source:FederalReserve,FlowofFundsAccountsoftheUnitedStates,2017.15.5OptimalCapitalStructurewithTaxes(2of3)DoFirmsPreferDebt?Whilefirmsseemtopreferdebtwhenraisingexternalfunds,notallinvestmentisexternallyfunded.Mostinvestmentandgrowthissupportedbyinternallygeneratedfunds.Eventhoughfirmshavenotissuednewequity,themarketvalueofequityhasrisenovertimeasfirmshavegrown.Fortheaveragefirm,theresultisthatdebtasafractionoffirmvaluehasvariedinarangefrom30%to45%.Figure15.6Debt-to-ValueRatio[D/(E+D)]ofU.S.Firms,1975–2017Source:CompustatandFederalReserve,FlowofFundsAccountsoftheUnitedStates,2017.15.5OptimalCapitalStructurewithTaxes(3of3)DoFirmsPreferDebt?Theuseofdebtvariesgreatlybyindustry.Firmsingrowthindustrieslikebiotechnologyorhightechnologycarryverylittledebt,whileairlines,automakers,utilities,andfinancialfirmshavehighleverageratios.Figure15.7Debt-to-EnterpriseValueRatioforSelectIndustries(1of2)Source:CapitalIQ,2018.Figure15.7Debt-to-EnterpriseValueRatioforSelectIndustries(2of2)Source:CapitalIQ,2018.LimitstotheTaxBenefitofDebt(1of7)Toreceivethefulltaxbenefitsofleverage,afirmneednotuse100%debtfinancing,butthefirmdoesneedtohavetaxableearnings.Thisconstraintmaylimittheamountofdebtneededasataxshield.Table15.4TaxSavingswithDifferentAmountsofLeverageBlankBlankNoLeverageModerateLeverageExcessLeverage1EBIT$1000$1000$10002Interestexpense0300500330%IncomeLimit3003003004InterestDeduction(smallerof2and3)03003005TaxableIncome(1–4)10007003006Taxes(21%of5)2101471477Netincome(1–2–6)790553353BlankTaxsavingsfromleverage$0$63$63LimitstotheTaxBenefitofDebt(2of7)Fromthepreviousslide:Withnoleverage,thefirmreceivesnotaxbenefit.Withmoderateleverage,thefirmsaves$63intaxes.Withexcessleverage,theinterestpaymentsexceedthe30%incomelimit.Inthiscase,theallowedinterestdeductioniscapped.Hence,oncethe30%limitisreached,thereisnoimmediatetaxshieldfromtheexcessleverage.LimitstotheTaxBenefitofDebt(3of7)Nocorporatetaxbenefitarisesfromincurringinterestpaymentsthatregularlyexceedtheincomelimit.Becauseinterestpaymentsconstituteataxdisadvantageattheinvestorlevel,investorswillpayhigherpersonaltaxeswith