Explore BrainMass

Explore BrainMass

    Modigliani-Miller Proof

    Not what you're looking for? Search our solutions OR ask your own Custom question.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Consider a Modigliani-Miller world with no taxes. In this world, consider a firm which
    is expected to generate constant cash flows in perpetuity. For this firm VU = VL = D+S
    and ks = k0 + (D/S)(k0 - kd). Now, assume that suddenly, a corporate tax at a rate
    T is imposed on the firm. Nothing else changes (i.e. the value of debt of the firm and
    k stay the same). Show that k does not change. That is, show k(new) = k where k(new) is the value of ks (the required return on equity) in a world with taxes.

    © BrainMass Inc. brainmass.com March 4, 2021, 10:55 pm ad1c9bdddf


    Solution Summary

    This solution provides a step-by-step explanation of how to calculate the given economics question.