M&M Proposition II with taxes:
A) has the same general implications as M&M Proposition II without taxes.
B) states that capital structure is irrelevant to shareholders.
C) supports the argument that business risk is determined by the capital structure decision.
D) supports the argument that the cost of equity decreases as the debt-equity ratio increases.
E) concludes that the capital structure decision is irrelevant to the value of a firm.

Question

Quizplus · Accepted Answer

With taxes, M&M Proposition II suggests that the cost of equity increases with leverage due to the tax shield on debt, which is different from the no-tax scenario where capital structure is irrelevant.

M&M Proposition II with Taxes