MM Proposition I with taxes supports the theory that:
A)there is a positive linear relationship between the amount of debt in a levered ﬁrm and its value.
B)the value of a ﬁrm is inversely related to the amount of leverage used by the ﬁrm.
C)the value of an unlevered ﬁrm is equal to the value of a levered ﬁrm plus the value of the interest tax shield.
D)a ﬁrm's cost of capital is the same regardless of the mix of debt and equity used by the ﬁrm.
E)a ﬁrm's weighted average cost of capital increases as the debt-equity ratio of the ﬁrm rises.

Question

Quizplus · Accepted Answer

MM Proposition I with taxes states that the value of a levered firm is equal to the value of an unlevered firm plus the present value of the tax shield on debt, indicating a positive relationship between debt and firm value.

MM Proposition I with Taxes Supports the Theory That