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 the above.

Question

Quizplus · Accepted Answer

MM Proposition I states that in perfect capital markets, the value of a firm is independent of its capital structure. However, when there are taxes, levered firms can benefit from the tax shield provided by the interest tax deductibility, which reduces their tax liability and increases their cash flows. Therefore, the value of a levered firm is higher than an identical unlevered firm, because it pays less taxes.

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