Modigliani and Miller's first article led to the conclusion that capital structure is "irrelevant" because it has no effect on a firm's value.However,that article was criticized because it assumed that no taxes existed.MM then revised their original article to include corporate taxes,and this model led to the conclusion that a firm's value would be maximized if it used (almost)100% debt.

Question

Quizplus · Accepted Answer

Modigliani and Miller's revised model, which included corporate taxes, concluded that due to the tax shield on debt interest, a firm's value increases as it increases its debt proportion, theoretically suggesting an optimal capital structure of nearly 100% debt.

Modigliani and Miller's First Article Led to the Conclusion That