We can now analyze the firm’s value numerically, using Miller’s model: if T c = 40%, T d = 30%, and T s = 12%, then Miller’s model becomes . D 25 .0 V D ) 75 .0 1 ( V D ) 30 .0 1 ( 12 .0 1 )( 40 .0 1 ( 1 V D T 1 ( ) T 1 )( T 1 ( 1 V V U U U D S C U L + = − + = ⎥ ⎦ ⎤ ⎢ ⎣ ⎡ − − − − + = ⎥ ⎦ ⎤ ⎢ ⎣ ⎡ − − − − + = d. 2. How does this gain compare to the gain in the MM model with corporate taxes? Answer: If only corporate taxes were considered, then V L = V U + T C D = V U + 0.40D. The net effect depends on the relative effective tax rates on income from stocks and bonds, and on corporate tax rates. The tax rate on stock income is reduced vis-à-vis the tax rate on debt income if the company retains more of its income and thus provides more capital gains. If T s declines, while T c and T d remain constant, the slope coefficient, which shows the benefit of debt in a graph like figure 4, is increased. Thus, a company with a low payout ratio gets greater benefits under the
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.