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If we extend the MMs framework by corporate taxes but no distress costs then a Equity becomes more attractive because it is subject to corporate tax and we can take advantage of the tax shield

If we extend the MM’s framework by corporate taxes (but no distress costs) then
a) Equity becomes more attractive because it is subject to corporate tax and we can take advantage of
the tax shield
b) Interest payments on debt are tax deductible which increases the weighted average cost of capital for
high levels of debt relative to the standard MM framework
c) The firm should be fully equity financed
d) The present value of future tax savings increases the market value of the firm
e) More than one answer is correct

Apr 15 2021 View more View Less

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