Question

g MM Proposition II with taxes: Group of answer choices reveals how utilizing the tax shield on debt causes an increase in the value of a firm. reaches the final conclusion that the capital structure decision is irrelevant to the value of a firm. supports the argument that the cost of equity decreases as the debt-equity ratio increases.

Answer 1

reveals how utilizing the tax shield on debt causes an increase in the value of a firm.

Step-by-step explanation:

According to the MM Proposition II with taxes, the value of a levered firm = Vu + tD

Where :

Vu = value of unlevered firm

tD = debt tax shield

In the presence of taxes, the value of a levered company is greater than that of the same company without debt with the same operating income.

Also, the WACC of a company with debt must be lower than that of an all equity company