In a world of modigliani and miller 1958 there are two, Ask an Expert

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In a world of Modigliani and Miller (1958), there are two firms, 1 and 2, where 1 is unlevered and 2 is levered: V1 = E and V2 = D2 + E2.

Both have the same asset generating X.

The firm can borrow at a rate of r. Assume that debt is riskless, X ≥ D2. Investors are taxed at a rate of tD for income from debt, and tE for income from equity. If investor’s tax rates tD and tE are the same, show that V1 = V2 using no arbitrage argument.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92425957

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