1. Explain how the value of a levered firm can be linked with the value of an unlevered one in a world with corporate tax and personal tax on income from equity and income from debt as discussed in Miller (1977). (6 marks)

2. Outline the effects on the value of a levered firm of the following situations:

1. A cut in the corporate tax rate for all companies (2 marks)
2. Personal taxes on income from equity and income from debt are the same

(2 marks)

3. Discuss the factors that the directors need to consider when making a financing decision between debt and equity in a world with corporate tax and risky-debt.

(5 marks)