MM Theory of Capital Gearing with Corporate Taxes

MM Theory of Capital Gearing with Corporate Taxes

MM used arguments similar to those discussed earlier to examine the impact of corporate taxes. They found that debt provides a benefit to the firm because of the tax deductibility of interest payments. The implication of their analysis in this case is that the value of the firm is maximized when its capital structure contains only debt. Although this extreme result is impractical because of limited access to capital markets and borrowings in reality, the inference is that firms should use as much debt as they possibly can.