In their later proposition II with taxes,Modigliani and Miller concluded that as more debt is added,the WACC of the firm falls,and the firm's overall value increases for the equity holder.

Question

Quizplus · Accepted Answer

Modigliani and Miller found that as more debt is added, the cost of equity increases due to the higher financial risk for the equity holders. However, the cost of debt is lower than the cost of equity, so the weighted average cost of capital (WACC) of the firm falls as more debt is added. This, in turn, increases the overall value of the firm for equity holders.

In Their Later Proposition II with Taxes,Modigliani and Miller Concluded