MM Proposition II is the proposition that:
A) supports the argument that the capital structure of a firm is irrelevant to the value of the firm.
B) the cost of equity depends on the return on debt, the debt-equity ratio and the tax rate.
C) a firm's cost of equity capital is a positive linear function of the firm's capital structure.
D) the cost of equity is equivalent to the required return on the total assets of a firm.
E) supports the argument that the size of the pie does not depend on how the pie is sliced.

Question

Quizplus · Accepted Answer

MM Proposition II states that the cost of equity increases linearly with the firm's debt-equity ratio, reflecting the increased risk to equity holders as leverage increases.

MM Proposition II Is the Proposition That