Professional Documents
Culture Documents
Assumptions
With taxes
Proposition 1
VL=VU
VL=VU+tD
Proposition 2
Re=r0+(r0-rd)D/E
r0+(r0-rd)(1-t)D/E
Other arguments
Miller argued that if investors face higher tax on income from debt
instruments compared to dividends they may demand higher
return on debt. This will increase the cost of debt
In Miller model depending on tax rates adding debt may not have
any impact on value, increase the value, or decrease the value of
a company
However tax is not the only factor which has an impact on levered
company
Other factors like cost of financial distress, agency costs, and
asymmetric information also play a major role in the
determination of value of levered company
Agency costs