If we start with the M&M perfect capital markets assumption and then relax the no tax assumption on corporations,then we would expect for firms that go from no leverage to some leverage to

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Quizplus · Accepted Answer

When the no tax assumption is relaxed, interest payments on debt become tax-deductible, which reduces the firm's taxable income and thus its taxes. This creates a tax shield that increases the value of the firm when it has leverage compared to when it has no leverage. This is in line with the Modigliani-Miller proposition with taxes.

If We Start with the M&M Perfect Capital Markets Assumption