The reason that MM Proposition I does not hold in the presence of corporate taxation is because:
A) levered firms pay less taxes compared with identical unlevered firms.
B) bondholders require higher rates of return compared with stockholders.
C) earnings per share are no longer relevant with taxes.
D) dividends are no longer relevant with taxes.
E) All of

Question

Quizplus · Accepted Answer

MM Proposition I states that the value of a firm is independent of its capital structure. However, in the presence of corporate taxation, this is no longer true because interest payments on debt are tax-deductible, reducing the amount of taxes paid by levered firms. This provides a tax advantage to levered firms over identical unlevered firms, causing their values to differ.

The Reason That MM Proposition I Does Not Hold in the Presence