Question

MM Proposition I with corporate taxes states that:

I. capital structure can affect firm value by an amount that is equal to the present value of the interest tax shield;
II. by raising the debt-to-equity ratio, the firm can lower its taxes and thereby increase its total value;
III. firm value is maximized by using an all-equity capital structure

a. I only
b. II only
c. III only
d. I and II

Answer 1

d.) I and II

Step-by-step explanation:

The first proposition can be regarded as proposition that gives a clam that capital structure of a company has no impact on the value. The value of a company is been known as present value of future cash flows when it's calculated, then it cannot be affected by capital structure. It should be noted that MM Proposition I with corporate taxes states that capital structure can affect firm value by an amount that is equal to the present value of the interest tax shield.