In Miller's model,when the quantity (1 - T_C)(1 - Tp_E)= (1 - Tp),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 firm should be financed by 100% equity.

Question

Quizplus · Accepted Answer

When the quantity (1 - T_C)(1 - Tp_E)= (1 - Tp) is satisfied, it means that the tax shield on debt is exactly offset by higher personal taxes paid on interest income. Therefore, there is no advantage to holding debt, and the firm should be financed by equity alone. This is known as the "Miller equilibrium," and it suggests that the value of the levered firm is the same as the value of the unlevered firm.

In Miller's Model,when the Quantity (1 - TC)(1 - TpE)=

In Miller's Model,when the Quantity (1 - T_C)(1 - Tp_E)=