Miller Model

Companies U and L are identical in every respect except that U is unlevered while L has $16 million of 8% bonds outstanding. Both firms have an EBIT of $2 million. Assume that all of the MM assumptions are met.

A) Suppose that both firms are subject to a 35% federal-plus-state corporate tax rate, investors in both firms face a tax rate of Td = 28% on debt income and Ts = 20% (on average) on stock income, and the appropriate required pre-personal-tax rate rsU is 10%.

What is the value of the unlevered firm, VU? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. $____million

What is the value of the levered firm, VL? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. $____million

What is the gain from leverage? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. $____million

B) Now keep the other assumptions (D = $16 million, r_d = 8%, EBIT = $2 million, and r_sU = 10%) but set T_c = T_s = T_d = 0.

What is the value of the unlevered firm, V_U? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. $____million

What is the value of the levered firm, V_L? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. $____million

What is the gain from leverage? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. $____million

C) Keep the other assumptions (D = $16 million, r_d = 8%, EBIT = $2 million, and r_sU = 10%) but now suppose T_d = T_s = 0 and T_c = 40%.

What is the value of the unlevered firm, V_U? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. $____million

What is the value of the levered firm, V_L? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. $____million

What is the gain from leverage? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. $____million

D) Keep the other assumptions (D = $16 million, r_d = 8%, EBIT = $2 million, and r_sU = 10%) but now suppose that T_d = 28%, T_s = 28%, and T_c = 40%.

Now what is the value of the levered firm? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. $____million

What is the gain from leverage? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. $____million