Answer Happy

Hello, the below is captured from lecture slide, may I know why
personal tax rate would affect the value of firm. Why should a firm
consider not only corporate tax rate but also the personal , the
investors' tax rate? THANKS!
Magic in Financial Leverage? Even if pre-tax cost of debt and cost of equity are equal on a risk-adjusted basis, then debt is cheaper on the after-tax basis Debt is beneficial ONLY in particular combinations of corporate and personal tax rates (adjustment coefficient >0) If the firm has other large tax shields, debt financing is not attractive Value of Tax Shield: Empirical Studies Graham, 2003: tax benefit function The value of tax shields: 9,7 % of market value of the firm based on modeling, as compared to simple approach 13,2% When adjusted to personal taxes tax benefits decrease to 4-7% firm value (Miller tax benefit adjustments)