In a world with corporate taxes,MM theory implies that that all firms should
A)maintain a constant value.
B)decrease in value as the leverage of the firm increases.
C)choose an all-debt capital structure.
D)select the capital structure that maximizes the firm's WACC.
E)select the capital structure that equates the marginal cost of debt with the marginal benefits.

Question

Quizplus · Accepted Answer

According to Modigliani and Miller's theory with corporate taxes, the value of a firm increases with leverage because debt interest payments are tax-deductible, which reduces the firm's tax liability. This implies that, in a world with taxes, firms should choose an all-debt capital structure to maximize their value.

In a World with Corporate Taxes,MM Theory Implies That That