 Leverage reduces corporate firms tax obligation and that reduction in tax obligation allows the firm to pay more of its earnings to its investors in the form of cash flows. But unfortunately the investors of the firm once they receive cash flows from the firm are required to pay taxes on these cash flows as their personal income. This means that if a debt holder receives interest from the firm, then he is required to pay tax on this interest which is treated as his income. Similarly, when an equity holder receives dividend and capital gains, he is required to pay tax on these two items which are not treated as his personal income. Now, let's see that how these additional taxes would have consequences for the value of the firm. So, how personal taxes can be incorporated into the interest tax shields. You see that a firm's value is equal to the cash that it can receive through the issuance of the securities. Now, the money that is paid by investors to purchase securities from the firm that money is subject to the cash flows the investors receive from the firm after payment of taxes on these cash flows by that particular firm. This means that the personal taxes reduces the firm value whereas the interest tax shield is in this particular case is now subject to the total taxes that is the corporate taxes and the personal taxes. Potentially, the personal taxes can offset the benefit of corporate taxism of the leveraged policy. This means that the interest income will be taxed more heavily than the capital gains from the equity transactions. The tax benefit of leverage should be determined through the evaluation of both the taxes. That means we must consider the corporate taxes and the personal taxes in order to determine the benefit of the leverage. For that purpose, we have an example where we have a $1.00 habit that can either be paid to the debt holders as interest or it can be paid to the equity holders as dividend. Now, how this income can be taxed? On the right side, we have a comparative table where we have after tax cash flows and the value that we will be determining using current tax rates. For debt holders, we see that the after tax cash flows are equal to 1 minus tax on personal income and this gives net after tax cash flows to the debt holders at their personal level equal to 0.604. And for equity holders, the after tax cash flows are the product of 1 minus corporate tax rate and the 1 minus tax on their equity income. So, this gives a net after tax cash flows of 0.52 and if we compare these two net cash flows in relative terms, we see that the effective tax benefit for the equity holders is 13.9%. This means that the equity holders in this case are receiving after tax a lesser amount than the debt holders. This also shows that the personal tax reduces the debt tax benefit for the equity holders from 35% to 13.9%. Paying an amount of interest after deducting the relative tax, effective tax benefit to the debt holders. This would be equal to the amount after tax profit pay to the equity holders. This means that the product of 1 minus effective tax rate and the 1 minus personal interest tax rate would be equal to the 1 minus corporate tax rate a multiplied with the 1 minus equity tax on the equity income. And if we determine the value of effective tax advantage or we simplify this equation to determine the value of T steric which is the after tax effective tax benefit of debt. So, the T steric would be equal to the product of 1 minus corporate tax rate and 1 minus equity tax divided by the 1 minus personal income tax. And in the absence of any personal tax or the equality between the personal tax rate and the equity tax rate, this T steric or the effective tax advantage of the debt would be equal to the corporate tax rate. And if the equity income is taxed less heavily, this means that the tax on personal income is greater than the tax on equity income, then the effective tax benefit of the debt would be greater than the corporate tax rate. Now, how the interest tax shield will be valued in the presence of personal taxism. For the effective tax benefit of the debt, if it is greater than 0, then despite any tax disadvantage of the debt at the personal level, net tax benefit for leverage will occur. And for permanent debt, the firm value with leverage will be equal to the sum of unlived firm's value and the interest tax shield of debt by the effective tax benefit of the leverage. So, personal tax advantage of debt generally implies that the effective tax benefit of debt is lesser than the tax on personal income. This means that it will also reduce the leverage benefit. And with the personal taxes, the firm's cost of equity and the cost of debt will adjust to compensate the investors for their respective tax burdens. And we will see that the personal tax advantage for debt causes vague to decline more slowly with the leverage.