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Tài liệu bài tập thưc hành môn Tài chính doanh nghiệp_ Chapter 16 | Chapter 16 Appendix The Miller Model and the Graduated Income Tax 16.17 a. According to the Miller Model in equilibrium rB 1 - TC rS where rB the pre-tax cost of debt the interest rate TC the corporate tax rate rS the required return on a firm s equity In this problem TC 0.35 rs 0.11 Therefore in order for there to be equilibrium rB 1 - TC rS rB 1 - 0.35 0.11 rB 0.11 1 - 0.35 0.1692 The equilibrium interest rate is 16.92 . b. In order to determine whether each group would prefer to hold debt or equity it is necessary to compare the after-personal tax interest rate to the required return on unlevered equity for each of the three groups of investors. A group of investors will prefer to hold the security that offers them the highest rate of return. The required rate of return to equity holders is 11 . Since the effective personal tax rate on equity distributions is zero personal taxes do not change the required return to equity holders. The market interest rate is 16.92 . The after-personal tax interest rate for investors who face a 10 tax on interest income is 15.23 0.1692 1 - 0.10 . Since the after-personal tax interest rate 15.23 is greater than the required return on equity 11 this group is better off holding debt. Investors whose interest income is taxed at 10 will buy debt. The after-personal tax interest rate for investors who face a 20 tax on interest income is 13.54 0.1692 1 - 0.20 . Since the after-tax interest rate 13.54 is greater than the required return on equity 11 this group is also better off holding debt. Investors whose interest income is taxed at 20 will buy debt. The after-personal tax rate interest rate for investors who face a 40 tax on interest income is 10.15 0.1692 1 - 0.40 . Since the after-tax interest rate 10.15 is less than the required return on equity 11 this group is also better off holding equity. Investors whose interest income is taxed at 40 will buy equity. c. According to the Miller Model firm value does not vary with capital .
