In a world with corporate taxes, MM theory implies that that all firms should: a

ID: 2764755 • Letter: I

Question

In a world with corporate taxes, MM theory implies that that all firms should:

a. maintain a constant value.

b. decrease in value as the leverage of the firm increases.

c. choose an all-debt capital structure.

d. select the capital structure that maximizes the firm's WACC.

e. select the capital structure that equates the marginal cost of debt with the marginal benefits.

In a world with corporate taxes, MM theory implies that that all firms should:

a. maintain a constant value.

b. decrease in value as the leverage of the firm increases.

c. choose an all-debt capital structure.

d. select the capital structure that maximizes the firm's WACC.

e. select the capital structure that equates the marginal cost of debt with the marginal benefits.

In a world with corporate taxes, MM theory implies that the firm should choose all debt capital structure.

This is because if there are corporate taxes, the cost will be minimized.

Due to the corporate taxes the cost of the debt will be minimized which results in borrowing at low cost.

Hence, the correct option is C.

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