When Modigliani and Miller relaxed their assumption of zero taxes, they concluded which of the following?
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A. B. C. D. E. F.F
When M&M relaxed their "no-taxes" assumption, they concluded that a firm's value was maximized only when its capital structure is composed of 100% debt. This is due to the tax-deductibility of debt. Due to these tax-shelter benefits, companies who are financed by 100% debt pass the maximum amount of their operating income to investors, and this should increase the attractiveness of the firm as an investment. M&M would be criticized on this finding, particularly because the risk of bankruptcy was completely ignored. This criticism would give birth to the "Trade-off Theory of Leverage," which states that companies will balance the tax- shelter benefits of debt with the increased interest rates and risk of bankruptcy that are associated with increased debt levels..