Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

After Modigliani and Miller's (MM) original no-tax theory, they went on to develop another theory that included corporate taxes. Subsequently, Miller developed another theory that

image text in transcribed
image text in transcribed
After Modigliani and Miller's (MM) original no-tax theory, they went on to develop another theory that included corporate taxes. Subsequently, Miller developed another theory that included the effects of both corporate and personal taxes. Complete the following sentence based on your understanding of the MM Model with Corporate Taxes: When personal taxes are included in the MM model, the taxes that stockhoiders pay on their bond and equity income created by the tax savings on corporate debt. Carrot Drug Company has no debt, and its value is $500.000 million. Ailing Pharmaceuticals Co, is otherwise identical but levered with $200.000 million in debt. Under the different models, what is the value of Alling Pharmoceuticals Co. if its corporate tax rate is 26%, the personal tox rate on equity is 8%, and the personal tax rate on debt is 28\%? (Note: Do not round intermediate calculations.) Adding personal taxes to the model lowers, but does not eliminate, the benefit from corporate debt, In the United States, taxes on capital gains are lower than on ordinary income and can be deferred. The effective rate on stock income is normally less than that on bond income, and although the personal tax on debt will lower the gain from corporate debt, it is not usually enough to eliminate it: Therefore, there is still a gain from leverage using Miller's model, as well as the MM model with corporate tax, Is the preceding information correct? Yes No

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Accounting And Finance For Non Specialists

Authors: Eddie McLaney, Peter Atrill

2nd Edition

0135717469, 9780135717462

More Books

Students also viewed these Accounting questions

Question

please dont use chat gpt or other AI 3 4 5 . SCADA .

Answered: 1 week ago