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# fm17 20 - If there are no personal or corporate taxes then...

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4 3 2 1 0 0.5 1.0 1.5 2.0 2.5 Value of Firm, V (Millions of \$) V U V L (\$) Debt (\$) TD Figure 4 d. Now suppose investors are subject to the following tax rates: T D = 30% and T S = 12%. 1. What is the gain from leverage according to the miller model? Answer: To begin, note that Miller’s Proposition I is stated as follows: V L = V U + ) T 1 ( ) T 1 )( T 1 ( 1 D S C D. Here the bracketed term replaces T in the earlier MM tax model, and T c = corporate tax rate, T d = personal tax rate on debt income, and T s = personal tax rate on stock income.
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Unformatted text preview: If there are no personal or corporate taxes, then T c = T s = T d = 0, and Miller’s model simplifies to V L = V U , Which is the same as in MM’s 1958 model, which assumed zero taxes. If there are corporate taxes, but no personal taxes, then T s = T d = 0, and Miller’s model simplifies to V L = V U + T C D, Which is the same as MM obtained in their 1963 article, which considered only corporate taxes. Mini Case: 17 - 20...
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