Question

The major contribution of the Miller model is that it demonstrates that a. financial distress and agency costs reduce the value of using corporate debt. b. personal taxes increase the value of using corporate debt. c. equity costs increase with financial leverage. d. personal taxes decrease the value of using corporate debt. e. debt costs increase with financial leverage.

Answer 1

Answer:

b. personal taxes increase the value of using corporate debt.

Explanation:

Since the interest on debt funding is excluded from corporate tax, the leverage may have a beneficial impact in increasing the valuation of a company. The value of the leveraged firm will also rise due to debt as compared with the value of the unlevered firm, since the unlevered firm does not benefit from the benefits of tax savings. When the debt increases, leverage gains increasing.

Hence, the correct option is b.