MM Proposition I,with taxes,is based on the concept that the
A)optimal capital structure is the one that is totally financed with equity.
B)capital structure of the firm does not matter because investors can use homemade leverage.
C)firm is worse off levered than unlevered.
D)value of the firm increases as total debt increases because of the interest tax shield.
E)cost of equity increases as the debt-equity ratio of a firm increases.

Question

Quizplus · Accepted Answer

MM Proposition I with taxes states that the value of the firm increases as total debt increases due to the interest tax shield. This proposition assumes that the tax deductibility of interest payments makes debt a cheaper source of finance than equity. Therefore, the optimal capital structure involves some level of debt.

MM Proposition I,with Taxes,is Based on the Concept That the