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Question 8.12: What are the implications of the Modigliani-Miller theory of...

What are the implications of the Modigliani-Miller theory of capital structure when the assumption of no corporate taxes is not valid?

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When there are taxes, the Modigliani-Miller theory implies that the optimal capital structure is the one with as much debt as possible—as long as there are no costs associated with financial distress.

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