At the beginning of the year, Yellow Dragon Foodstuffs, Inc. had an unlevered value of $9,000,000....

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At the beginning of the year, Yellow Dragon Foodstuffs, Inc. had an unlevered value of $9,000,000. It pays federal and state taxes at the marginal rate of 40%, and currently has $3,000,000 in debt capital in its capital structure. According to MM Proposition I with taxes, Yellow Dragon Foodstuffs is allowed to recognize a tax shield of the firm is and the levered value of $10,200,000. $7,800,000. O $12,000,000. $6,000,000. In 1977, Merton Miller added to the discussion regarding the effect of taxes on a firm's value by including the effect of personal income taxes. He was interested in how the presence of individual income taxes would affect business's use of debt financing, and developed the following model for the I value of a levered firm: V = Vu+ D [1-(1-T) (1-Ts)], (1-T) where T, Ts, and Ta represent the tax rates imposed on corporate income, personal income from equity investments, and personal income from debt investments, respectively. A basic premise of Miller's work, under the current US Tax Code, is that investors are willing to accept a investments than on bond investments because tax rates imposed on equity investments are lower than those imposed on bond investments. bond investments are lower than those imposed on equity investments. pre-tax return on equity The result of Miller's work is the conclusion that the US Tax Code produces two competing pressures that affect a business's use of leverage. These two conflicting effects are the deductibility of -which creates a tax shield-favors the use of the preferential tax treatment of income (dividends and capital gains) favors the use of financing in a firm's capital structure; financing. At the beginning of the year, Yellow Dragon Foodstuffs, Inc. had an unlevered value of $9,000,000. It pays federal and state taxes at the marginal rate of 40%, and currently has $3,000,000 in debt capital in its capital structure. According to MM Proposition I with taxes, Yellow Dragon Foodstuffs is allowed to recognize a tax shield of the firm is and the levered value of $10,200,000. $7,800,000. O $12,000,000. $6,000,000. In 1977, Merton Miller added to the discussion regarding the effect of taxes on a firm's value by including the effect of personal income taxes. He was interested in how the presence of individual income taxes would affect business's use of debt financing, and developed the following model for the I value of a levered firm: V = Vu+ D [1-(1-T) (1-Ts)], (1-T) where T, Ts, and Ta represent the tax rates imposed on corporate income, personal income from equity investments, and personal income from debt investments, respectively. A basic premise of Miller's work, under the current US Tax Code, is that investors are willing to accept a investments than on bond investments because tax rates imposed on equity investments are lower than those imposed on bond investments. bond investments are lower than those imposed on equity investments. pre-tax return on equity The result of Miller's work is the conclusion that the US Tax Code produces two competing pressures that affect a business's use of leverage. These two conflicting effects are the deductibility of -which creates a tax shield-favors the use of the preferential tax treatment of income (dividends and capital gains) favors the use of financing in a firm's capital structure; financing.