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 and IV only
B)I and IV only
C)II,III,and IV only
D)II and III only
E)II only

Question

Quizplus · Accepted Answer

According to M&M Proposition I, with taxes, the value of a levered firm increases only as a result of an increase in the value of the unlevered firm (II). Decrease in the amount of debt (I) and decrease in tax rate (III) would not impact the value of the levered firm. Increase in interest rate on debt (IV) would decrease the value of a levered firm according to M&M Proposition I. Therefore, the best choice is E - II only.

Which of the Following Will Increase the Value of a Levered