Suppose Stoler Food Co. had an unlevered value of $85 million. Stoler\'s margina

Question

Suppose Stoler Food Co. had an unlevered value of $85 million. Stoler's marginal tax rate is 38%, and it has $40 million in debt. According to MM's proposition with taxes, what is the levered value of the company? $100.20 million $69.80 million $45.00 million $125.00 million Adding to the discussion regarding the effect of taxes on the firm's value, Miller further discussed the effect of taxes from an investor's perspective. His focus was on the effect of personal taxes and to what extent personal taxes can diminish the benefit of debt financing. He represented the value of a levered firm as: VL = VU + [1-(1-Tc)(1-Ts)/(1-Td)]D According to Miller's theory on the impact of personal taxes, which of the following statements is true? Income from a stock can be deferred until an investor decides to realize capital gains from the stock. This favors equity financing. Debt financing has a disadvantage over equity financing because it provides interest deductibility.

Explanation / Answer

Value of levered:

= Value of unlevered+Tax×Debt

= $85 million+$40 millions×38%

= $100.2 million

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