Which one of the following statements is correct in relation to M&M Proposition II, without taxes?
A) The cost of equity remains constant as the debt-equity ratio increases.
B) The cost of equity is inversely related to the debt-equity ratio.
C) The required return on assets is equal to the weighted average cost of capital.
D) Financial risk determines the return on assets.
E) Financial risk is unaffected by the debt-equity ratio.

Question

Quizplus · Accepted Answer

M&M Proposition II without taxes states that the required return on assets (or the firm's overall cost of capital) remains constant and is equal to the weighted average cost of capital (WACC), regardless of the firm's capital structure. This implies that changes in the debt-equity ratio do not affect the WACC.

Which One of the Following Statements Is Correct in Relation