Home › CA Inter › Financial Management › MM Approach › Modigliani-Miller Hypothesis WITH corporate taxe…
Modigliani-Miller Hypothesis WITH corporate taxes implies:
ACapital structure is irrelevant
BEquity should always be 100%
CValue of levered firm = Value of unlevered firm + tax shield on debt
DDebt is irrelevant
Answer & Solution
Correct answer: C. Value of levered firm = Value of unlevered firm + tax shield on debt
1. With taxes: Vl = Vu + (t × D).
2. Interest on debt provides a tax shield.
3. Firm value rises with debt up to capacity.
_Source: ICAI BoS CA Inter Paper 6A, Ch 5 "Financing Decisions — Capital Structure", §2.4_