What causes the change in optimal strategy when taxes are added back to the M&M theorem?
A) The fact that we have added taxation differentially
B) The fact that both dividends and interest are taxable to the receiver
C) The fact that it changes the effect that an increase in leverage has on the stockholders' expected returns
D) The fact that it changes the volatility of stockholders' expected returns

Question

Quizplus · Accepted Answer

The introduction of taxes in the Modigliani-Miller theorem affects the optimal strategy because taxes are applied differently to debt and equity, making debt financing more attractive due to the tax shield on interest payments.

What Causes the Change in Optimal Strategy When Taxes Are