In a world with no frictions, Miller and Modigliani argue that capital structure is irrelevant and that firm value will remain unchanged as the capital structure changes. Assume now that you introduce tax benefit for debt, what would you expect the right mix of debt and equity to be?

1. All

2. The firm should be all equity funded.

3. Debt and equity should be equal

4. The firm should be all debt funded

5. Debt would still be irrelevant.

6. None