The difference between the M&M theory Case I (no taxes no bankruptcy costs) and M&M Case II (taxes no bankruptcy costs) is:

1.The relationship between cost of equity and leverage linear in Case I and non-linear in Case II

2.Debt is more important according to Case I

3.Case I does not consider the advantages of debt but Case II only considers the advantages of debt

4.Case I has an optimal capital structure while Case II does not

5. Cost of equity increases with cost of equity in Case I only