ABC Corp is considering a change in its capital structure by altering its debt-to-equity ratio. According to the Modigliani-Miller Propositions, in a world with no taxes and perfect capital markets, the value of the firm is unaffected by its capital structure. However, ABC Corp operates in a real-world scenario where imperfect markets, taxes, and other frictions exist.
If ABC Corp increases its leverage by taking on more debt, it could reduce its overall tax burden due to the interest tax shield. On the other hand, increasing debt might also increase the firm's financial risk and potentially lead to higher costs of equity and debt. Given that ABC Corp wants to optimize its capital structure, which of the following statements aligns most closely with the Modigliani-Miller Propositions regarding capital structure decisions?