In relation to M&M Proposition II with no taxes, financial risk determines the return on assets.

Question

Quizplus · Accepted Answer

M&M Proposition II with no taxes states that the cost of equity increases with financial leverage due to the increased risk borne by equity holders, but it does not imply that financial risk determines the return on assets. The return on assets is determined by the firm's operating performance, not its capital structure.

In Relation to M&M Proposition II with No Taxes, Financial