According to M&M Proposition I with taxes, the interest tax shield:
A) Affects the net earnings, but not the value of a ﬁrm.
B) Increases the pre-tax rate of return on debt.
C) Increases the value of a ﬁrm.
D) Lowers the ﬁrm's cost of equity.
E) Increases the ﬁrm's weighted average cost of capital.

Question

Quizplus · Accepted Answer

The interest tax shield reduces taxable income, thereby increasing the value of a firm by the present value of the tax shield.

According to M&M Proposition I with Taxes, the Interest Tax