MM Proposition I with taxes is based on the concept that:
A)the optimal capital structure is the one that is totally ﬁnanced with equity.
B)the capital structure of the ﬁrm does not matter because investors can use homemade leverage.
C)the ﬁrm is better off with debt based on the weighted average cost of capital.
D)the value of the ﬁrm increases as total debt increases because of the interest tax shield.
E)the cost of equity increases as the debt-equity ratio of a ﬁrm increases.

Question

Quizplus · Accepted Answer

MM Proposition I with taxes states that the value of the firm increases as total debt increases due to the interest tax shield. This means that the optimal capital structure involves using some level of debt financing to take advantage of the tax benefits, which results in a higher overall value for the firm.

MM Proposition I with Taxes Is Based on the Concept