Which of the following is the best deﬁnition of M&M Proposition II?
A) The tax saving attained by a ﬁrm from interest expense.
B) Termination of the ﬁrm as a going concern.
C) The value of the ﬁrm is independent of its capital structure.
D) A ﬁrm's cost of equity capital is a positive linear function of its capital structure.
E) Financial restructuring of a failing ﬁrm to attempt to continue operations as a going concern.

Question

Quizplus · Accepted Answer

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

Which of the Following Is the Best Deﬁnition of M&M