Permanent debt is €1,000.00. Corporate tax is 24.00%, personal tax on equity income 5.00%, and personal tax on debt income 10.00%. Use the Miller personal-tax model.
- A.Calculate the net tax advantage.
Corporate and Personal Taxes
A.
€197.78.
Corporate and Personal Taxes
Permanent debt is €2,000.00. Corporate tax is 27.00%, personal tax on equity income 6.00%, and personal tax on debt income 12.00%. Use the Miller personal-tax model.
- A.Calculate the net tax advantage.
A.
€440.45.
Corporate and Personal Taxes
- A.When is the net debt tax advantage zero in the corporate-and-personal-tax model?
A.
It is zero when the after-tax cash received from equity income equals the after-tax cash received from debt income per euro of pretax corporate income. The corporate tax saving is then exactly offset by the personal-tax disadvantage of interest.
Corporate and Personal Taxes
- A.How does the value of debt tax shields respond to corporate tax, personal equity tax and personal debt tax?
A.
Holding debt constant, higher corporate tax or personal tax on equity increases the net tax advantage of debt. Higher personal tax on debt reduces it. This conclusion uses the Miller model, not a simple corporate-tax-only shield.
Corporate and Personal Taxes
Carolina is an all-equity, stationary company with annual EBIT of €3,000 thousand and corporate tax of 40%. It considers issuing €13,500 thousand of permanent debt at 10% to repurchase shares. All earnings are distributed. Compare the two proposed income statements below. All amounts are in € thousands.
| Annual amount | No debt | With debt |
|---|---|---|
| EBIT | 3,000 | 3,000 |
| Interest | 0 | 1,350 |
| Profit before tax | 3,000 | 1,650 |
| Corporate tax | 1,200 | 660 |
| Net income / dividends | 1,800 | 990 |
Initially, personal tax is 30% on both dividends and interest. Part C deliberately imposes an equal after-personal-tax equity return in both structures; assess that assumption in part E rather than treating it as a consistent MM recapitalisation.
- A.Compare total after-tax cash received by shareholders and debtholders. Which structure do investors prefer?
- B.Which structure does the tax authority prefer?
- C.Assume shareholders require 20% after personal tax in both cases. Calculate the values implied by this assumption, taking debt at par.
- D.Set personal equity tax to 20% and personal interest tax to 55%. Compare annual investor cash flows and the net tax advantage of debt.
- E.Critique the equal-return assumption and check whether the proposed financing is consistent with the MM valuation.
A.
Debt raises total annual investor cash flow by €378 thousand.
B.
The tax authority receives €378 thousand more without debt. Investor cash flow plus total taxes equals EBIT of €3,000 thousand in both cases.
C.
Conditional value under the imposed assumption: €16,965 thousand.
These are the arithmetic values implied by a 20% net equity return in both cases and debt at par. They are not an equilibrium-consistent MM valuation; part E explains why.
D.
Without debt, investors receive €40.50 thousand more each year.
The personal tax disadvantage of interest outweighs corporate interest deductibility. Under the Miller model, the net tax advantage of debt is negative.
E.
Debt adds financial risk to equity, so applying the same required equity return to both structures is generally inconsistent with MM. Moreover, the proposed €13,500 thousand debt exceeds the €6,300 thousand unlevered value implied in part C.
The negative implied equity is a consistency warning, not a valid equity valuation. These inputs cannot jointly support the assumed debt at par, full tax-shield valuation and a feasible share repurchase. Do not report €11,700 thousand as a feasible levered value or mix the MM result with the equal-return calculation in part C. A coherent recapitalisation would require revised financing and risk assumptions.
Corporate and Personal Taxes
Paylater is initially all-equity financed, with 500 shares and equity value 16,000.00. Its unlevered required return is 9.00%. It issues permanent debt of 5,000.00 at 3.00% to repurchase shares. Corporate tax is 40.00%. Annual distributable earnings are 1,440, so RU = 1,440 / 16,000 = 9%. For the final part, personal tax on equity income is 12.00% and on interest 25.00%.
- A.Find the original firm value, share price and unlevered required return.
- B.Calculate the post-announcement value and share price.
- C.Calculate the new equity return and WACC.
- D.Recalculate value with personal taxes.
A.
Annual distributable earnings are 1,440, so RU = 1,440 / 16,000 = 9%.
Unlevered required return = 9.00%.
B.
The main answer assumes repurchase at the fair price after the announcement. If shares are contractually bought at the old price, the remaining share price instead equals 37.818182.
C.
WACC = 8.0000%.
D.
Fair announcement share price = 34.96. The net tax advantage is positive.