Which of the following statements correctly relate to M&M Proposition I,with taxes?
I.Debt decreases the value of a firm.
II.The levered value of a firm exceeds the firm's unlevered value.
III.The weighted average cost of capital (WACC)is constant.
IV.The optimal capital structure is zero debt.
A)I only
B)II only
C)II and III only
D)I and IV only
E)I, III, and IV only

Question

Quizplus · Accepted Answer

M&M Proposition I with taxes states that the value of a levered firm is greater than the value of an unlevered firm due to the tax shield on debt. Therefore, statement II is correct. The WACC is not constant when taxes are considered, as the cost of debt is reduced by the tax shield, making statement III incorrect.

Which of the Following Statements Correctly Relate to M&M Proposition