Reference no: EM132743635
Please answer, very urgent
Use Miller's Model in capital structure theory to answer this question.
ABC Company has a constant EBIT that is expected to continue in perpetuity. The value of ABC Company when it does not have any debt is $500,000. The unlevered cost of equity (R0) for the company is 10% and the corporate tax rate is 35%. The personal tax rate on equity income is 40% and the personal tax rate on bond income is 22%.
(a) If the company issues a perpetual bond with a market value of $400,000,
(1) What is the value of the company with leverage and with no financial distress cost?
(2) For every dollar of debt, is there a gain or loss from leverage for the company? If yes, what is this gain/loss from leverage for every dollar of debt?
(b) If all of the above remains constant except for the personal tax rate on bond income (TB), what TB would make the company have zero gain from the leverage of $400,000?
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