which of the following is true? a. As leverage increases, the value of the firm increases...
which of the following is true?
a. As leverage increases, the value of the firm increases according to the MM theory with corporate taxes.
b. As leverage increases, the value of the firm decreases according to the MM theory with corporate taxes
c. Taxes rates on interest and dividends are always the same.
d. The US tax code encourages companies to use debt.
Homework Answers
True: a. As leverage increases, the value of the firm increases according to the MM theory with corporate taxes.
Interest on Debt is tax deductible thus increase leverage increases the value of firm.
According to MM theory with corporate taxes:
Value of Firm = Value of unlevered firm + Debt*tax rate
Hope it will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.
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