When the assumptions of Modigliani and Millers Irrelevance Hypothesis regarding corporate capital structure are relaxed so that they are more consistent with real-world conditions, i.e. there are corporate taxes (and interest payments are tax deductible) and there are costs of financial distress, then which of the following is true?

Firm value and WACC areindependentof the firm's capital structure.

Firm valueincreasesand WACCincreasesinitially as more debt is added to the firm's capital structure, however, there comes a point where adding additional debt generates potential costs of financial distress that outweigh the benefits of further reducing taxes. After this point, firm value and WACC start todecreaseas more debt is added.

Each firm has an optimal capital structure where firm value is minimized.

Each firm has an optimal capital structure where WACC is maximized.

Firm valueincreasesand WACCdecreasesinitially as more debt is added to the firm's capital structure, however, there comes a point where adding additional debt generates potential costs of financial distress that outweigh the benefits of further reducing taxes. After this point, firm value starts todecreaseand WACC starts toincreaseas more debt is added.