What does the Miller model imply about the effect of corporate debt on the

# What does the miller model imply about the effect of

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3.What does the Miller model imply about the effect of corporate debt on the valueof the firm, that is, how do personal taxes affect the situation?
f.How is the analysis in part C different if firms U and L are growing? Assumethat both firms are growing at a rate of 7 percent and that the investment in netoperating assets required to support this growth is 10 percent of EBIT.Answer:If a firm is growing, the assumptions that MM made are violated. The extension tothe MM model shows how growth affects the value of the debt tax shield and the costof capital. The first difference in this situation is that the appropriate discount rate forthe debt tax shield is the unlevered cost of equity, not the cost of debt. The seconddifference is that a growing debt tax shield is more valuable than a constant debt taxshield. First, calculate expected free cash flow:NOPAT = EBIT X (1-T) = 500,000 X (1 – 0.40) = \$300,000Investment In Net Operating Assets = 0.10 X EBIT = \$50,000Free Cash Flow = NOPAT – Investment In Net Operating Assets= \$300,000 - \$50,000 = \$250,000(Note that this is an expected value for the coming year since EBIT is an expectedvalue for the coming year.)

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