Question: In Miller's model, when the quantity (1 TC)(1 TpE) > (1 Tp), where Tp is the personal tax rate on interest income, TpE is the

In Miller's model, when the quantity (1 TC)(1 TpE) > (1 Tp), where Tp is the personal tax rate on interest income, TpE is the personal tax rate on dividends, and Tc is the corporate tax rate.

Which of the following is true?

A) the firm should hold more debt than equity.

B) the value of the levered firm is greater than the value of the unlevered firm.

C) the tax shield on debt is exactly offset by higher personal taxes paid on interest income.

D) the firm should be financed by 100 percent equity.

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