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 rely on the tax shield provided by interest payments. If tax laws change to treat interest and dividends equally, the tax advantage of debt financing is eliminated, challenging the MM propositions.

Which One of These Events Might Cause the Biggest Challenge