In Miller's model, when the quantity (1-T_c)(1-T_s) = (1-T_b), then: A) the firm should hold no debt. B) the value of the levered firm is greater than the value of the unlevered firm. C) the tax shield on debt is exactly offset by higher personal taxes paid on interest income. D) the tax shield on debt is exactly offset by higher levels of dividends. E) the tax shield on debt is exactly offset by higher capital gains.

Question

Quizplus · Accepted Answer

This equation represents a scenario where the tax shield benefits from debt (due to interest deductions) are exactly offset by the higher personal taxes paid on the interest income received by debt holders. This balance negates the advantage of debt financing from a tax perspective, aligning with option C.

In Miller's Model, When the Quantity (1-Tc)(1-Ts) = (1-Tb), Then

In Miller's Model, When the Quantity (1-T_c)(1-T_s) = (1-T_b), Then