Under the M&M assumptions with taxes, the value of a firm with debt is the value of the firm without debt plus the present value of the interest tax shield.

Question

Quizplus · Accepted Answer

The M&M (Modigliani-Miller) theorem with taxes states that the value of a firm with debt is equal to the value of the firm without debt plus the present value of the interest tax shield. This interest tax shield is created by the tax-deductibility of interest payments on debt, which reduces a firm's tax liability and increases its cash flows. Therefore, the answer is A.

Under the M&M Assumptions with Taxes, the Value of a Firm