In Miller's model,when the quantity [(1 - Tc)(1 - Ts) = (1 - Tb)],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

In Miller's model, when the quantity [(1 - Tc)(1 - Ts) = (1 - Tb)], it means that the tax benefits of debt (Tb) are exactly offset by the higher personal taxes paid on interest income (Tc) and the reduced taxes paid on dividends (Ts). Therefore, the tax shield on debt is exactly offset by higher personal taxes paid on interest income. This implies that the value of the levered firm is equal to the value of the unlevered firm, and the firm should hold no debt. Hence, option C is the correct answer.

In Miller's Model,when the Quantity [(1 - Tc)(1 - Ts)