In a world with corporate taxes but no possibility of financial distress, the value of the firm is maximized when the:

Question

Quizplus · Accepted Answer

In a world with corporate taxes but no possibility of financial distress, the value of the firm is maximized when the firm uses no equity in its capital structure. This is because debt interest payments are tax-deductible, which reduces the firm's taxable income and thus its tax liability, increasing the overall value of the firm. This concept is derived from the Modigliani-Miller theorem on capital structure, which, under these conditions, suggests that a firm can reduce its overall cost of capital and increase value by financing entirely with debt.

In a World with Corporate Taxes but No Possibility of Financial