The bottom line of the Modigliani and Miller capital structure theory is that:
A) companies should not use debt.
B) companies should use as much debt as possible.
C) there is tradeoff between the benefits of debt (i.e., interest deductibility) and the costs of debt (i.e., costs to financial distress).

Question

Quizplus · Accepted Answer

The Modigliani and Miller capital structure theory, in its proposition with taxes, suggests that there is a trade-off between the benefits of debt, such as the tax shield provided by interest deductibility, and the costs associated with debt, including the potential for financial distress. This implies that the optimal capital structure balances these factors.

The Bottom Line of the Modigliani and Miller Capital Structure