showed that in a world without taxes, a firm's value is not affected by its capital structure.

Question

Quizplus · Accepted Answer

Without the presence of taxes, the interest paid on debt financing is not deductible, making the cost of debt equal to the cost of equity. As a result, a firm's value is not affected by its capital structure. This is known as Modigliani-Miller proposition I. However, in a world with taxes, the presence of debt financing can provide tax shields, making the cost of debt lower than the cost of equity, thus affecting a firm's value.

Showed That in a World Without Taxes, a Firm's Value