Problem 21-3 Miller Model with Corporate and Personal Taxes An unlevered firm ha

Question

Problem 21-3 Miller Model with Corporate and Personal Taxes An unlevered firm has a value of $850 million. An otherwise identical but levered firm has $290 million in debt. Under the Miller model, what is the value of the levered firm if the corporate tax rate is 40%, the personal tax rate on equity is 25%, and the personal tax rate on debt is 35%? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Do not round intermediate calculations. Round your answer to two decimal places. $ ____ million

anw is not 966 million

Explanation / Answer

Answer:

As per Miller's model:

tc = Corporate Tax, tb = personal tax on debt, ts = personal Tax on equity

Value of levered firm:

= $850 million + [1- {(1-0.4)(1-0.25)/(1-0.35)}] *$290 million

= $850 million + [1-{(0.6*0.75)/0.65}]*$290 million

= $939.23 million

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