The reason that MM Proposition I without taxes does not hold in the presence of corporate taxation is because:
A)levered firms pay less taxes compared with identical unlevered firms.
B)bondholders require higher rates of return than stockholders do.
C)earnings per share are no longer relevant with taxes.
D)dividends become a tax shield.
E)debt is more expensive than equity.

Question

Quizplus · Accepted Answer

With corporate taxation, interest payments on debt are tax-deductible, which reduces the amount of taxable income for levered firms. This means that levered firms pay less taxes compared with identical unlevered firms. As a result, the value of a levered firm with taxes is higher than that of an identical unlevered firm, contrary to MM Proposition I without taxes.

The Reason That MM Proposition I Without Taxes Does Not