MM Proposition II with taxes:
A)has the same general implications as MM Proposition II without taxes.
B)reveals how the interest tax shield relates to the value of a ﬁrm.
C)supports the argument that business risk is determined by the capital structure employed by a ﬁrm.
D)supports the argument that the cost of equity decreases as the debt-equity ratio increases.
E)reaches the ﬁnal conclusion that the capital structure decision is irrelevant to the value of a ﬁrm.

Question

Quizplus · Accepted Answer

MM Proposition II with taxes states that the value of a firm is still dependent on its earnings and the risk of its assets, but now also includes the benefit of the interest tax shield. This proposition still supports the idea that the capital structure decision does not affect the value of a firm, just as MM Proposition II without taxes did. Therefore, it has the same general implications as MM Proposition II without taxes.

MM Proposition II with Taxes