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

According to M&M Proposition I with tax, the value of a levered firm increases as the debt-equity ratio increases. This is because tax deductibility of interest payments on debt reduces the overall cost of capital, leading to an increase in firm value. Therefore, the presence of tax benefits can make it desirable for firms to increase their debt levels.

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