Which of the following statements concerning capital structure theory is NOT CORRECT?
A) Under MM with zero taxes, financial leverage has no effect on a firm's value.
B) Under MM with corporate taxes, the value of a levered firm exceeds the value of the unlevered firm by the product of the tax rate times the market value dollar amount of debt.
C) Under MM with corporate taxes, rs increases with leverage, and this increase exactly offsets the tax benefits of debt financing.
D) Under MM with corporate taxes, the effect of business risk is automatically incorporated because rsL is a function of rsU.
E) The major contribution of Miller's theory is that it demonstrates that personal taxes decrease the value of using corporate debt.

Question

Quizplus · Accepted Answer

Under MM with corporate taxes, the tax benefits of debt financing are not exactly offset by the increase in rs (cost of equity) with leverage. The tax shield from debt increases the value of the firm.

Which of the Following Statements Concerning Capital Structure Theory Is