According to Modigliani and Miller, living in a world with both corporate and personal taxes allows...
According to Modigliani and Miller, living in a world with both corporate and personal taxes allows firms to maximize their value by continually increasing their use of debt financing.
Group of answer choices
True
False
Homework Answers
It shall be noted that according to Modigliani and Miller, in the presence of corporate and personal taxes, a levered company pays less tax than an all-equity company does. This is because, the government has chosen to "subsidize" interest payments to providers of debt capital, which means that debt financing is tax-deductible.
When the assumption of no taxes is relaxed, the market value of the company increases by taking on more riskfree debt. Consequently, the company should take on 100 % debt to optimize company value. T
Thus, the firm can maximize its value by continually increasing its use of debt financing, in the presence of both corporate and personal taxes.
Hence, the given statement is True.
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