Boo Chegg... You only did part A on my first submission. How about B and C below
ID: 2719934 • Letter: B
Question
Boo Chegg... You only did part A on my first submission. How about B and C below?
After Modigliani and Miller's (MM) original no-tax theory, they went on to develop another theory that included corporate taxes. Miller then developed a theory that included corporate and personal taxes.
A)
Complete the following sentence based on your understanding of the MM Model with corporate Taxes:
MM's Model that included corporate taxes concluded that ______ debt is the best way to capitalize a firm.
Choices for above fill-in-the-blank are: 100% or 0%
B)
Markum Co. has no debt, and its value is $600.0 million. Carter Co. is otherwise identical but levered with $240.0 million in debt. Under the different models, what is the value of Carter Co. if its corporate tax rate is 27%, the personal tax rate on equity is 12%, and the personal tax rate on debt is 29%?
Consider the following info:
Adding personal taxes to the model lowers, but does not eliminate, the benefit from corporate debt. In the US, taxes on capital gains are lower than on ordinary income and can be deferred. The effective rate on stock income is normally less than that on bond income, and although the personal tax on debt will lower the gain from corporate debt, it is not usually enough to eliminate it. Therefore, there is still a gain from leverage using Miller's model, as well as the MM model of corporate tax.
Is the preceding information correct?
Yes or no?
MM w/o taxes 600.00, or 762.0, or 563.8 or 664.8 MM w/ corporate taxes 536.0 or 664.8, or 622.8, or 762.0 Miller with corporate and personal taxes 622.8 or, 817.2, or 664.8, or 762.0?Explanation / Answer
A) 100 % Debt ... because firm value gets maximized with 100 percent debt due to tax shield on debt which reduces expenses.
B) Value of firm in first case = Value of unlevered firm = 600m
Value of firm in second case = Value of unlevered firm + debt*tax rate
= 600 + 240*0.27 = 664.8m
Value of firm in 3 rd case
V (D) =Value of unlevered firm + [1 - (1 - corporate tax)*(1 - tax on equity)/(1- tax on debt)]*debt
= 600 + [1-(1-.27)*(1-.12)/(1-.29)]*240 = 622.85
3) Yes the information is correct