Which of the following will increase the value of a levered firm according to M&M Proposition I, with taxes? I. decrease in the amount of the debt
II) increase in the value of the unlevered firm
III) decrease in the tax rate
IV) increase in the interest rate on the debt
A) II only
B) I and IV only
C) II and III only
D) II and IV only
E) II, III, and IV only

Question

Quizplus · Accepted Answer

According to M&M Proposition I with taxes, the value of a levered firm increases with the tax shield provided by debt. An increase in the value of the unlevered firm (II) directly increases the value of the levered firm.

Which of the Following Will Increase the Value of a Levered