Please attempt to answer all correctly. Thanks MMII and the effect of taxes Debt

Question

Please attempt to answer all correctly. Thanks

MMII and the effect of taxes Debt financing has one important advantage that the early MM propositions ignored: interest on debt is tax deductible. The amount that taxes are reduced because of the use of debt is called the interest tax shield. Consider this case: suppose Stoler Food Co. had an unlevered value of $95 million. Stoler's marginal tax rate is 37%, and it has $45 million in debt. According to MM's proposition with taxes, what is the levered value of the company? O $50.00 million O $140.00 million O $78.35 million O $111.65 million Adding to the discussion regarding the effect of taxes on t from an investor's perspective. His focus was on the effect of pers diminish the benefit of debt financing. He represented the value of a levered he firm's value, Miller further discussed the effect of taxes onal taxes and to what extent personal taxes can fit of debt financing. He represented the value of a levered firm as: According to Miller's theory on the impact of personal taxes, which of the follo wing statements is true? antage over equity financing because it provides interest deductibility O Debt finandng has a disadv O Incom e from a stock can be deferred until an investor deades to realize capital gains from the stock. This favors equity financing.

Explanation / Answer

Following statement is true:

Income from a stock can be deferred until an investor decides to realise capital gains from the stock. This favours equity financing

Value of Unlevered Firm = Vul+Dt Vul = Value of unlevered firm Dt = Debt *Tax rate Vl = 95+45*0.37 $ 111.65

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