Which one of these events might cause the biggest challenge to the MM propositions?
A)An increase in the corporate tax rates
B)A decrease in the cost of debt
C)An increase in a firm's unlevered WACC
D)A new law requiring equal lending rates for all borrowers
E)A change in tax laws to treat interest and dividends equally

Question

Quizplus · Accepted Answer

The MM propositions, particularly Proposition II, are predicated on the tax advantage of debt due to the deductibility of interest payments. A change in tax laws to treat interest and dividends equally would eliminate this advantage, directly challenging the MM propositions' conclusions about capital structure irrelevance in a world with taxes.

Which One of These Events Might Cause the Biggest Challenge