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 the value of a firm is independent of its capital structure. However, in the presence of corporate taxation, levered firms pay less taxes compared with identical unlevered firms. This means that the value of a firm is influenced by its capital structure, and MM Proposition I does not hold.

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