If we include the cost of bankruptcy in the MM analysis of capital structure in a world with taxes,we would tend to believe that the cost of debt increases as leverage increases and that there is probably an optimal capital structure.

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Including the cost of bankruptcy in the MM analysis of capital structure in a world with taxes would increase the cost of debt as leverage increases, which implies that the optimal capital structure exists where the cost of debt is minimized and the value of the firm is maximized. Hence, we tend to believe that there is an optimal capital structure in this scenario.

If We Include the Cost of Bankruptcy in the MM