[Verse 1] Two professors had a theory back in fifty-eight Said capital structure doesn't change your company's fate But then they looked at taxes and they changed their mind Interest payments save you money, here's what they designed [Chorus] Tax shield, tax shield, debt can be your friend Interest payments lower what you pay and send To the government each year, deductions make it clear M and M with taxes says leverage has its cheer Tax shield, tax shield, multiply your rate By your debt amount, that's the value you create [Verse 2] When you borrow money, interest goes on your expense Uncle Sam takes thirty percent, that's your defense If you pay a hundred thousand in interest each year Thirty thousand tax savings will magically appear [Chorus] Tax shield, tax shield, debt can be your friend Interest payments lower what you pay and send To the government each year, deductions make it clear M and M with taxes says leverage has its cheer Tax shield, tax shield, multiply your rate By your debt amount, that's the value you create [Bridge] But remember there's a limit to this debt financing game Bankruptcy costs rise as your risk becomes untame The optimal structure balances the shield against the cost Too much debt means benefits will surely be lost [Verse 3] Modigliani Miller showed us debt creates some worth Through the tax deductibility that gives your firm rebirth Value of the levered firm equals unlevered plus the shield Tax rate times your debt amount shows the benefit you'll yield [Chorus] Tax shield, tax shield, debt can be your friend Interest payments lower what you pay and send To the government each year, deductions make it clear M and M with taxes says leverage has its cheer Tax shield, tax shield, multiply your rate By your debt amount, that's the value you create [Outro] So remember this equation when you're structuring your deals Interest tax deductibility is what the tax shield reveals
← Modigliani-Miller Without Taxes | Financial Distress and Trade-off Theory →