According to MM, if we ignore bankruptcy costs, an increase in financial leverage can increase the value of the firm:

A) in a world without taxes.
B) if interest is tax-deductible.
C) if interest is not tax-deductible.
D) a and b
E) All of the above

MM Model

The Modigliani-Miller theorem, proposing that in an ideal market, the value of a firm is unaffected by its capital structure.

Financial Leverage

The degree to which a company uses fixed-income securities such as debt and preferred equity in its capital structure.

Tax-Deductible Interest

Interest on loans that can be subtracted from one's taxable income, thereby reducing the overall tax liability.