Which of the following assumptions outlined by Modigliani and Miller (MM) theory is realistic?
A) Brokerage costs do not exist.
B) Personal income taxes do not exist.
C) Bankruptcy does not exist.
D) The value of a firm will be maximized by financing almost entirely with debt.
E) Interest on capital debt is tax deductibile.

Question

Quizplus · Accepted Answer

The assumption that interest on capital debt is tax deductible is realistic, as it reflects the current tax laws in many countries. This can result in a lower cost of financing for companies and encourage them to use more debt in their capital structure. The other assumptions listed (A, B, C, and D) are not realistic as they do not reflect the real-world conditions of most companies.

Which of the Following Assumptions Outlined by Modigliani and Miller