Complete the following sentence based on your understanding of the MM Model with corporate taxes: MM's model that included the existence of corporate taxes concluded that 100% debt is the best way to capitalize a firm. Alumiscape Corporation has no debt, and a value of $40.000 million. Metallica Metals is otherwise identical but has $16.000 million of debt in its capital structure. Under the different models, what is the value of Metallica Metals if its corporate tax rate is 30%, the personal tax rate on equity 8%, and the personal tax rate debt is 30 %? (Note: Do not round intermediate calculations.) Model MM without taxes MM with corporate taxes Miller with corporate and personal taxes Consider the following information: Adding personal taxes to the model lowers, but does not eliminate, the benefit from corporate debt. In the United States, taxes on capital gains are lower than on ordinary income and can be deferred. The effective rate on stock income is normally less than that on bond income, and although the personal tax on debt will lower the gain from corporate debt, it is not usually enough to eliminate it. Therefore, there is still a gain from leverage using Miller's model, as well as the MM model with corporate tax. Is the preceding information correct? No Metallica Metals Value Yes
Complete the following sentence based on your understanding of the MM Model with corporate taxes: MM's model that included the existence of corporate taxes concluded that 100% debt is the best way to capitalize a firm. Alumiscape Corporation has no debt, and a value of $40.000 million. Metallica Metals is otherwise identical but has $16.000 million of debt in its capital structure. Under the different models, what is the value of Metallica Metals if its corporate tax rate is 30%, the personal tax rate on equity 8%, and the personal tax rate debt is 30 %? (Note: Do not round intermediate calculations.) Model MM without taxes MM with corporate taxes Miller with corporate and personal taxes Consider the following information: Adding personal taxes to the model lowers, but does not eliminate, the benefit from corporate debt. In the United States, taxes on capital gains are lower than on ordinary income and can be deferred. The effective rate on stock income is normally less than that on bond income, and although the personal tax on debt will lower the gain from corporate debt, it is not usually enough to eliminate it. Therefore, there is still a gain from leverage using Miller's model, as well as the MM model with corporate tax. Is the preceding information correct? No Metallica Metals Value Yes
Chapter13: Capital Structure Concepts
Section: Chapter Questions
Problem 4P
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Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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Transcribed Image Text:Complete the following sentence based on your understanding of the MM Model with corporate taxes:
MM's model that included the existence of corporate taxes concluded that 100% debt is the best way to capitalize a firm.
Alumiscape Corporation has no debt, and a value of $40.000 million. Metallica Metals is otherwise identical but has $16.000 million of debt in its
capital structure. Under the different models, what is the value of Metallica Metals if its corporate tax rate is 30%, the personal tax rate on equity
8%, and the personal tax rate an debt is 30% ? (Note: Do not round intermediate calculations.)
Model
MM without taxes
MM with corporate taxes
Miller with corporate and personal taxes
Consider the following information:
Adding personal taxes to the model lowers, but does not eliminate, the benefit from corporate debt. In the United States, taxes on
capital gains are lower than on ordinary income and can be deferred. The effective rate on stock income is normally less than that on
bond income, and although the personal tax on debt will lower the gain from corporate debt, it is not usually enough to eliminate it.
Therefore, there is still a gain from leverage using Miller's model, as well as the MM model with corporate tax.
Is the preceding information correct?
No
Metallica Metals Value
Yes
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