In Miller's model, when the quantity (1 - T_C)(1 - Tp_E) = (1 - Tp), then

Question

Quizplus · Accepted Answer

According to Miller's model, the value of the levered firm is equal to the value of the unlevered firm plus the present value of the tax shield on debt. However, personal taxes paid on interest income reduce the benefit of the tax shield on debt. When (1 - T_C)(1 - Tp_E) = (1 - Tp), it means that the tax shield on debt is exactly offset by the higher personal taxes paid on interest income. Therefore, the firm should be financed in a way that minimizes the personal tax burden, which may mean a combination of debt and equity, but not necessarily 100% equity. The correct choice is C.

In Miller's Model, When the Quantity (1 - TC)(1 -

In Miller's Model, When the Quantity (1 - T_C)(1 -