Question

Cruz Corporation has $100 billion of debt outstanding. An otherwise identical firm has no debt and has a market value of $650 billion. Under the Miller model, what is Cruz’s value if the federal-plus-state corporate tax rate is 28%, the effective personal tax rate on stock is 17%, and the personal tax rate on debt is 29%? Enter your answer in billions. For example, an answer of $1.23 billion should be entered as 1.23, not 1,230,000,000. Round your answer to two decimal places.

Answer 1

Solution :

Here, By using miller model we get,

Value of Cruz = Value of Levered firm = VU + [ 1 - { ( 1 - Tc )*( 1 - Ts ) / ( 1 - Td ) } ] * D

Where,

Value of Unlevered ( VU ) = $650 billion

Federal plus state corporate tax rate ( Tc ) = 28%

Effective personal tax rate on stock ( Ts ) = 17%

Effective personal tax rate on debt ( Td ) = 29% and

Debt of Cruz ( D ) = $100 billion

Now,

Value of Levered firm = 650 + [ 1 - { ( 1 - 28% )*( 1 - 17% ) / ( 1 - 29% ) } ] * 100

= 650 + [ 1 - { ( 0.72 )*( 0.83 ) / ( 0.71 ) } ] * 100

= 650 + [ 1 - 0.841690141 ] * 100

= 650 + 0.158309859 * 100

= 650 + 15.83

Value of Cruz = $665.83 billion