Tax Benefits of Debt: Maximizing Firm Value

This lecture explores the impact of debt on firm value through tax benefits. It discusses how issuing debt can increase firm value by capturing tax benefits, the market's response to different types of transactions, and the valuation methods incorporating tax savings. The instructor presents real-world examples, such as Nestle's debt policy and leveraged recapitalizations, to illustrate the concepts. The lecture also covers the Adjusted Present Value method, interest tax shields, and the effects of leverage on the cost of capital. By the end, students will understand how debt financing can optimize firm value by leveraging tax advantages.