Which of the following correctly completes the following: M&M I with taxes shows ___________________.
A) The value of an unlevered firm exceeds the value of a levered firm by the present value of the interest tax shield.
B) A levered firm can increase its value by reducing debt.
C) The optimal amount of leverage for a firm is not possible to determine.
D) The value of a levered firm is equal to its after-tax EBIT discounted by the unlevered cost of capital.
E) There is a linear relationship between the amount of debt in a levered firm and its value.

Question

Quizplus · Accepted Answer

M&M Proposition I with taxes states that the value of a levered firm increases with the amount of debt due to the tax shield on interest, indicating a linear relationship between debt and firm value.

Which of the Following Correctly Completes the Following: M&M I