In a world with no taxes,Modigliani and Miller (MM)show that a firm's capital structure does not affect its value.However,when taxes are considered,MM show a positive relationship between debt and value,i.e. ,the firm's value rises as it uses more and more debt,other things held constant.

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Modigliani and Miller's proposition with taxes suggests that due to the tax deductibility of interest payments, increasing debt in a firm's capital structure can reduce taxable income and thus increase the firm's value by reducing its tax liability. This creates a positive relationship between the level of debt and the value of the firm.

In a World with No Taxes,Modigliani and Miller (MM)show That