Firm is constant across all capital structures

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Question

Following Modigliani and Miller with all of its assumptions, where we find that the value of the firm is constant across all capital structures. When we introduce corporate taxes to the model, we find that the value of the firm is maximized by introducing as much debt as possible to the firm's capital structure. In reality, we know that the value of the firm is maximized with a capital structure that involves debt but not extremely high levels of debt. What realistic items do we need introduce beyond the Modigliani and Miller model with corporate taxes, in order to make our model more realistically reflect the relationship between capital structure and the value of the firm? Explain each briefly.

Reference no: EM134039723

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