fm17 21 - We can now analyze the firms value numerically...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
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
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

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.

Ask a homework question - tutors are online