Define each of following terms: a. MM Proposition I without taxes; with corporate taxes b. MM Proposition II without taxes; with corporate taxes c. Miller model d. Financial distress costs e. Agency...

PPSub160117_599653_1
Assignment Title: Define each of following
terms: a. MM Proposition I
without
Define each of following terms:
a. MM Proposition I without taxes; with corporate taxes:
b. MM Proposition II without taxes; with corporate taxes
c. Miller model
d. Financial distress costs
e. Agency costs
f. Trade-off model
g. Value of debt tax shield
h. Equity as an option
Consider two identical firms with different financial structures.
Let them be called U and L, where U is unlevered one and financed by equity only
and V is levered one, financed by equity and debt.
MM theorem says that the values of the two firms is the same.
VU = VL
In other words, the price of L = Price of U –L’s debt.
With corporate taxes, let Tcbe the tax rate and D be the debt of L.
Then VL= VU+TcD
i.e. there are advantages for levered firms since leverage lowers tax payments.
b) MM Proposition II without taxes;
Define each of following
terms: a. MM Proposition I
without
with corporate taxes:
Where rE = Rate of return on equity = unlevered equity + financing premium
:r0 = Company cost of...