Modigliani and Miller followed up their initial work with a new model that incorporated a world with corporate taxes.Which of the statements below results from this model?
A)A new Proposition I with taxes and it states: All debt financing is optimal.
B)A new Proposition II with taxes and it states: The WACC of the firm falls as more debt is added.
C)The more debt sold,the greater the tax shield and the smaller the government's share of the firm.
D)All of these

Question

Quizplus · Accepted Answer

Modigliani and Miller's model with corporate taxes resulted in a new Proposition I which states that all debt financing is optimal, and a new Proposition II which states that the WACC (weighted average cost of capital) of the firm falls as more debt is added. The model also shows that the more debt a firm sells, the greater the tax shield, and the smaller the government's share of the firm. Hence, all of the statements (A, B and C) are true.

Modigliani and Miller Followed Up Their Initial Work with a New