Answer:
When we take taxes into account, MM's 1958 Proposition could no longer hold, and the capital structure can be essential because of:
Explanation:
The propositions of Miller and Modigliani are that a firm's market value does not depend on the capital structure and the cost of equity increases as the percentage of debt increases.
But, when taxes are accounted for, MM's Propositions are no longer tenable, because debts provide interest tax shield and the market value of a firm is impacted by debts' interests and the tax shield that interests provide. Tax burden is reduced with interests on debts. This increases the Earnings per share, an important element in the valuation of a firm's market value.
The cause due to which capital structure is significant as per MM's 1958 proposition would be:
B). Interest tax shield.
The propositions made by MM i.e. Miller and Modigliani state that the value of a specific firm must not rely upon the capital structure it possesses.
They rather laid emphasis on calculating the worth by deducting that the tax shield is being displayed due to the interests received on the debts owned by the company.
This leads the firms to release their burden of taxes by shielding it through debts and as a result, the income increases. Therefore, this element must be involved while calculating the value of the firm.
Thus, option B is the correct answer.
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