Under Modigliani and Miller with tax considerations, how is debt perceived?

In the context of Modigliani and Miller's propositions with tax considerations, debt is perceived as cheaper primarily because of the tax shield it provides. When a firm uses debt financing, the interest payments on that debt are tax-deductible, which effectively lowers the overall tax burden for the company. This tax benefit makes debt a more attractive option compared to equity financing, where dividends are not tax-deductible.

As a result, the after-tax cost of debt is lower than the cost of equity, leading to the perception that debt is a cheaper source of financing. This notion encourages firms to take on more debt to leverage the tax benefits, which can enhance the firm's value and return on equity. Hence, within the framework of Modigliani and Miller, the inclusion of taxes alters the assessment of debt, favoring it as a more economical choice for capital structure decisions.