Question

Which of the following correct value of leverage firm (VL) under the Miller's model with Corporate...

Which of the following correct value of leverage firm (VL) under the Miller's model with Corporate and personal taxes? Assuming that the corporate tax rate is 35% (Tc), the personal tax rate on debt income (Td) is 33% and the personal tax rate on stock income (Ts) is 10%

options:

VL = VU+[0.25]D

VL = VU+[0.55]D

VL = VU+[0.35]D

VL = VU+[0.43]D

VL = VU+[0.13]D
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Answer #1

Correct answer: VL = VU+[0.13]D

M&M proposition-1 with corporate tax and personal tax suggest following equation for value of Firms:

where,

VL = Value of levered firm

VU = Value of unlevered firm

Tc = Corporate tax

D = Debt

Putting the values:

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