In a world with no taxes,MM shows that a firm's capital structure does not affect the firm's value.However,when taxes are considered,MM show a positive relationship between debt and value,i.e.,its value rises as its debt is increased.

Question

Quizplus · Accepted Answer

According to MM's theorem, in a world with no taxes, the firm's value is not affected by its capital structure. However, when taxes are introduced, the firm's value increases with the amount of debt used in the capital structure due to the tax benefits of interest payments on debt. Therefore, the correct statement is that there is a positive relationship between debt and value in the presence of taxes.

In a World with No Taxes,MM Shows That a Firm's