Why does MM Proposition I,without taxes,not hold in the presence of corporate taxation?
A)Bondholders require higher rates of return when their interest payments are taxed.
B)Dividends are no longer relevant when taxes are introduced.
C)A levered firm will pay less tax than the identical firm unlevered.
D)The cost of equity increases with leverage.
E)The pretax cost of debt increases when taxes are considered.

Question

Quizplus · Accepted Answer

With corporate taxation, interest payments on debt are tax-deductible, reducing the overall tax burden for a levered firm compared to an unlevered firm, thus affecting the firm's value and invalidating MM Proposition I without taxes.

Why Does MM Proposition I,without Taxes,not Hold in the Presence