What is the conclusion of part 2 of Modigliani and Miller

Question

What is the conclusion of part 2 of Modigliani and Miller - taxes, but no costs to financial distress?
A) The more debt, the greater value of the company
B) There is some optimal capital structure for a company
C) Management should be indifferent in how to finance the company

Quizplus · Accepted Answer

In part 2 of Modigliani and Miller's theory, which includes taxes but ignores costs of financial distress, the conclusion is that the more debt a company has, the greater its value. This is because debt interest payments are tax-deductible, reducing the company's taxable income and thus its tax liability, which in turn increases the value of the company.