Suppose Stoler Food Co. had an unlevered value of $90 million. Stolers marginal tax rate is 34%, and it has $35 million in debt.

According to MMs proposition with taxes, what is the levered value of the company?

$78.10 million

$55.00 million

$125.00 million

$101.90 million

Adding to the discussion regarding the effect of taxes on the firms value, Miller further discussed the effect of taxes from an investors perspective. His focus was on the effect of personal taxes and to what extent personal taxes can diminish the benefit of debt financing. He represented the value of a levered firm as:

VLVL

= =

VU+[(1(1 - Tc)(1 - Ts)(1 - Td))]DVU+[11 - Tc1 - Ts1 - Td]D

According to Millers theory on the impact of personal taxes, which of the following statements is true?

A. According to Miller, equity financings advantage over debt financing results from investors inability to defer the dividend and capital gains income provided by the equity.

B. Debt financing has an advantage over equity financing because it provides an interest tax shield.