After Modigliani and Miller's (MM) original no-tax theory, they went on to develop another theory that...

Transcribed Image Text:

After Modigliani and Miller's (MM) original no-tax theory, they went on to develop another theory that included corporate taxes. Subsequently, Miller developed another theory that included the effects of both corporate and personal taxes. 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 debt is the best way to capitalize a firm. Building Blocks Construction has no debt, and a value of $55.000 million. Cubicon Construction is otherwise identical but has $22.000 million of debt in its capital structure. Under the different models, what is the value of Cubicon Construction if its corporate tax rate is 35%, the personal tax rate on equity is 10%, and the personal tax rate on debt is 27%? (Note: Do not round intermediate calculations.) Model MM without taxes MM with corporate taxes Miller with corporate and personal taxes Consider the following information: Cubicon Construction Value 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? Yes No After Modigliani and Miller's (MM) original no-tax theory, they went on to develop another theory that included corporate taxes. Subsequently, Miller developed another theory that included the effects of both corporate and personal taxes. 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 debt is the best way to capitalize a firm. Building Blocks Construction has no debt, and a value of $55.000 million. Cubicon Construction is otherwise identical but has $22.000 million of debt in its capital structure. Under the different models, what is the value of Cubicon Construction if its corporate tax rate is 35%, the personal tax rate on equity is 10%, and the personal tax rate on debt is 27%? (Note: Do not round intermediate calculations.) Model MM without taxes MM with corporate taxes Miller with corporate and personal taxes Consider the following information: Cubicon Construction Value 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? Yes No