# The Capital Structure Theory

Solve each question by analyzing the situation below.

A business with no debt financing has a firm value of $20 million. It has a corporate marginal tax rate of 34%. The firm's investors are estimated to have marginal tax rates of 31% on interest income and a weighted average of 28% on stock income. The business is planning to change its capital structure by issuing $10 million in debt and repurchasing $10 million in common stock.

1. According to the Modigliani-Miller Theorem (M-M) view with corporate taxes, what is the value in millions of dollars of the levered business?

a. $22.44 b. $23.40 c. $20 d. $30 e. 26.40 f. None listed.

2. According to the Miller view with corporate & personal taxes, what is the gain from leverage in millions of dollars?

a. $3.11 b. $8.50 c. $6.48 d. $0.00 e. $4.65 f. None listed

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#### Solution Preview

1. According to the Modigliani-Miller Theorem (M-M) view with corporate taxes, what is the value in millions of dollars of the levered business?

a. $22.44 b. $23.40 c. $20 d. $30 e. 26.40 f. none ...

#### Solution Summary

The capital structure theories are examined.