Iodgliani and Miller Proposition I with Taxes Debt financing has one important advantage that the early Modiglianl and Milier (MM) propositions ignored: the interest on business debt is tax Seductible. This benefit means that the amount of taxes that a business is required to pay will be reduced by a phenomenon called an interest tax shield, which is a function of the amount of debt in the firm's capital structure and its tax rate. In contrast, the dividends that a corporation pays on ts common and preferred shares are not tax deductible. Consider the case of Blue Chipmunk Foodstuffs, Inci: At the beginning of the year, Blue Chipmunk foodstuffs, Ine, had an unlevered value of $9,000,000. It pays federal and state taxes at the marginal rate of 40%, and currently has $2,500,000 in debt capital in its capital structure. According to MM Proposition I with taxes, Blue Chipmunk Foodstuffs is allowed to recegnize a tax shieid of and the levered value of the firm is $11,500,000.$6,000,000.$10,000,000.$6,500,000. In 1977 , Merton Miller added to the discussion regarding the effect of taxes on a firmis value by induding the effect of personal income taxes. He was interested in how the presence of ind vidual income taxes would affect bushess's use of debt financing, and developed the folowing model for the value of a levered firm: where Ti,Tw and T4 represent the tax rates imposed on corporate income, personal income from equty investments, and personal income from debt investrients, respectively. According to MM Proposition I with taxes, Blue Chipmunk Foodstuffs is allowed to recognize a tax shield of and the levered value of the firm is $11,500,000.$8,000,000.$10,000,000.$6,500,000. In 1977. Merton Miller added to the discussion regarding the effect of taxes on a firm's value by including the effect of personal income taxes, He was interested in how the presence of individual income taxes would affect business's use of debt financing, and developed the foliowing model for the value of a levered firm: where Tk,Ti, and Td represent the tax rates imposed on corporate income, personal income from equity investments, and personal income from debt investments, respectively. A basic premise of Miller's work, under the current US tax Code, is that investors are willing to accept a pre-tax return on equity investments than on bond investments because tax rates imposed on equity investments are lover than those imposed on bond investments. bond investments bre lower than those imposed on equity investments. The resuit of Miller's work is the conclusion that the US Tax Code produces two competing pressures that affect a business's use of leverage. These two conflicting effects are - the deductibility of - which crestes a tax shield-favors the use of financing in a firm's capital structure; - the preferential tax trestment of income (dividends and capital gains) favors the use of Financing