Now suppose investors are subject to the following tax rates: Td = 30% and Ts = 12%.
Question:
Now suppose investors are subject to the following tax rates: Td = 30% and Ts = 12%.
(1) What is the gain from leverage according to the Miller mode1?
(2) How does this gain compare with the gain in the MM model with corporate taxes?
(3) What does the Miller model imply about the effect of corporate debt on the value of the firm; that is, how do personal taxes affect the situation?
David Lyons, CEO of Lyons Solar Technologies, is concerned about his firm’s level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies average about 30% debt, and Mr. Lyons wonders why they use so much more debt and how it affects stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant:
Step by Step Answer:
1 To begin note that Millers Proposition I is stated as follows V L V U D Here the bracketed term replaces T in the earlier MM tax model and T c corpo...View the full answer
