Modigliani and Miller's second article,which assumed the existence of corporate income taxes,led to the conclusion that a firm's value would be maximized,and its cost of capital minimized,if it used (almost)100% debt.However,this model did not take account of bankruptcy costs.The existence of bankruptcy costs leads to the assumption of an optimal capital structure where the debt ratio is less than 100%.

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Modigliani and Miller's second article did not take into account bankruptcy costs, leading to their conclusion that a firm's value would be maximized with 100% debt. However, in reality, bankruptcy costs do exist, leading to an optimal capital structure where the debt ratio is less than 100%.

Modigliani and Miller's Second Article,which Assumed the Existence of Corporate