MM Proposition I with corporate taxes states that:
I. Capital structure can affect firm value by an amount that is equal to the present value of the interest tax shield
II. By raising the debt-to-equity ratio, the firm can lower its taxes and thereby increase its total value
III. Firm value is maximized at an all debt capital structure

Question

Quizplus · Accepted Answer

MM Proposition I with corporate taxes suggests that the value of a leveraged firm is higher than an unleveraged firm by the present value of the tax shield on debt, implying that increasing debt can increase firm value and that firm value is maximized with an all-debt capital structure.

MM Proposition I with Corporate Taxes States That