According to the MM model of capital structure, the present value of the tax shield is offset by potential ____, resulting in an optimal capital structure.
A)bankruptcy costs
B)interest expense
C)operating costs
D)a and b

Question

Quizplus · Accepted Answer

According to the Modigliani-Miller (MM) model of capital structure, while the present value of the tax shield on debt can increase firm value, this benefit is offset by potential bankruptcy costs. This interplay suggests that there might be an optimal capital structure balancing these factors, although the original MM proposition without taxes asserts capital structure irrelevance.

According to the MM Model of Capital Structure, the Present