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7. Modigliani and Miller models After Modigliank and Maler's (MM) original no-tax theory, they went on to develop another theory that included corporate taxes. 5ubsequentiy, Miller deveioped another theory that included the effects of both corporote and personal taxes. Complete the following sentence bused on your understanding of the MM Model with carporate taxes: When personat taves are included in the MM model; the taxes that stockholders pay on their bond and equity inceme the benefin created by the tax savings on corporate debt. Carrot Drug Company has no debt, and a value of $50.000 million. Ailing Pharmsceuticals Company is otherwise identical but has $20.000 million of debt in its capital sructure. Under the different models, what is the value of Aling Pharmaceuticals Compony if its corporate tax rate is 35%, the personal tax rate on equity is BW, and the personal tax rate on debt is 28% ? (Note: Do not round intermediste calculations.) Consider the following infermation: Adding personal taxes to the inodel lowers, but does not eliminate, the benefic from corporate debt, tn the United 5 tates, taxes on capital gains are lower than on endinary income and can be deferred. The effective rate en stock income is normally less than that en bond income, and although the personal tox on debt will lower the gain from corporate debt, it is not usualiy enough to elims inate it. Therefore, there is sail a gain from leverage using Milier's model, as well as the MM model with corporate tax. Adding personal taxes to the model lowers, but does not eliminate, the benefs from corporate debs. 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 wall lower the gain from corpora: it, is not usualy 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