Under MM theory discount rate for the tax shield is the cost of debt. This is resonable because they assume that tax shield on the interest payment is sure stream. Recently, the application of contingent claims analysis has attracted a lot of attention. If there is a high correlation between the $\widetilde{EBIT}$ (earning before interest and taxes) and interest payment, creditor's and share holder's wealth are exposed to business risks and therefore the risk of tax shield is a function of $\widetilde{EBIT}$and interest payment. If interest payments vary with $\widetilde{EBIT}$ or business risks, this study claims that an appropriate discount rate for the tax shield should be discounted at ρ(unlevered cost of equity).
