MM Proposition I with taxes is based on the concept that:
A) the optimal capital structure is the one that is totally financed with equity.
B) the capital structure of the firm does not matter because investors can use homemade leverage.
C) the firm is better off with debt based on the weighted average cost of capital.
D) the value of the firm increases as total debt increases because of the interest tax shield.
E) the cost of equity increases as the debt-equity ratio of a firm increases.

Question

Quizplus · Accepted Answer

MM Proposition I with taxes suggests that the value of the firm increases as the total debt increases due to the interest tax shield. This is because interest on debt is tax-deductible, reducing the tax burden and increasing the firm's cash flow. Therefore, a higher debt level is beneficial for the firm's value.

MM Proposition I with Taxes Is Based on the Concept