The reason that MM Proposition I does not hold in the presence of corporate taxation is because:
A) levered firms pay less taxes compared with identical unlevered firms.
B) bondholders require higher rates of return compared with stockholders.
C) earnings per share are no longer relevant with taxes.
D) dividends are no longer relevant with taxes.

Question

Quizplus · Accepted Answer

MM Proposition I, which states that the value of a leveraged firm is equal to the value of an unleveraged firm, does not hold in the presence of corporate taxation because interest payments on debt are tax-deductible. This means that levered firms pay less in taxes compared to identical unlevered firms, which increases the value of levered firms.

The Reason That MM Proposition I Does Not Hold in the Presence