With the inclusion of taxes, MM I is incorrect and the capital structure of the firm can be important due to:

Question

Quizplus · Accepted Answer

The correct answer is C because interest payments on debt are tax-deductible, which reduces the tax liability of the firm. Thus, the capital structure of the firm can affect its taxes, making it important to consider when making financial decisions. Option A is incorrect because currently, taxes on dividends are generally higher than on capital gains. Option B is incorrect because taxes on retained earnings are generally deferred until they're distributed, but they are typically taxed at the same rate as ordinary income. Option D is incorrect because the level of operating income is not related to the capital structure of the firm.

With the Inclusion of Taxes, MM I Is Incorrect and the Capital