Modigliani and Miller Proposition II states that the rate of return required by the shareholders increases, steadily, as the firm's debt-equity ratio increases.

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Modigliani and Miller Proposition II, also known as MM Proposition II, states that the cost of equity increases as the firm's leverage or debt-equity ratio increases. This is because the increased risk associated with higher debt levels results in shareholders demanding a higher rate of return to compensate for this increased risk.

Modigliani and Miller Proposition II States That the Rate of Return