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Assume the Modigliani and Miller no-tax model holds. Assume that a firm has 20 percent of its capital structure in the form of debt, which
Assume the Modigliani and Miller no-tax model holds. Assume that a firm has 20 percent of its capital structure in the form of debt, which has a cost of 6 percent. Now the firm moves to 60 percent debt in its capital structure, again with a cost of 6 percent. What two effects occur as the firm moves from 20 percent debt to 60 percent debt? How do these effects counterbalance each other?
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