M&M Proposition I with tax states that the value of a levered firm increases as the:
A) Level of debt decreases.
B) Tax rate of the firm decreases.
C) Debt-equity ratio increases.
D) Unlevered value of the firm decreases.
E) Inflation rate increases.

Question

Quizplus · Accepted Answer

M&M Proposition I with tax posits that the value of a levered firm is higher than the value of an unlevered firm by the tax shield on debt. This implies that as the debt-equity ratio increases, the value of the firm increases due to the tax benefits of debt.

M&M Proposition I with Tax States That the Value of a Levered