Based on the capital structure graph shown in the attachment, select the incorrect statement.

A. The horizontal line labeled A represents M&Ms Irrelevance Theorem without taxes.

B. VU on the Y-axis represents the value of an under-leveraged firm.

C. The positively sloped straight line labeled B indicates that the firm value will keep rising as more leverage is employed (i.e., as the firm uses more and more debt).

D. The curve labeled C indicates that the firms value will decrease once it passes the optimal leverage (L*) because the firm would face greater bankruptcy costs and agency costs which would offset the tax advantage of debt.

Question 1 Capital Structure ts