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The major contribution of the Miller model is that it demonstrates that a. personal taxes decrease...

The major contribution of the Miller model is that it demonstrates that a. personal taxes decrease the value of using corporate debt. b. financial distress and agency costs reduce the value of using corporate debt. c. equity costs increase with financial leverage. d. debt costs increase with financial leverage. e. personal taxes increase the value of using corporate debt.

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Answer #1

The major contribution of the Miller model is that it demonstrates that personal taxes decrease the value of corporate debt. Since the interest on debt finance is exempted from corporate tax, the leverage may have positive effect to increase a firm’s value. Therefore, the value of levered firm will increase because of leverage when compared to the value of un-unlevered firm, because the unlevered firm will not have benefit of the value of tax savings. As the debt rises, gain from leverage raises.

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Answer #2

Answer : a. Personal taxes decrease the value of using corporate debt.

  • Miller Modgilini I theory without taxes that a firm's relative proportions of debt and equity.
  • It says that the firm with the greater proportion of debt is more valuable because of the interest tax shield.
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