MM Proposition I with taxes is based on the concept that the:
A)optimal capital structure is the one that is totally financed with equity.
B)capital structure of the firm does not matter because investors can use homemade leverage.
C)firm is better off with debt based on the weighted average cost of capital.
D)presence of taxes causes debt to be valuable to a firm.
E)cost of equity increases as the debt-equity ratio of a firm increases.

Question

Quizplus · Accepted Answer

MM Proposition I with taxes states that the presence of taxes makes debt valuable to a firm because interest payments are tax-deductible, lowering the cost of debt financing. Therefore, as the firm increases its debt level, the overall cost of capital decreases, increasing the firm's value.

MM Proposition I with Taxes Is Based on the Concept