The formula associated with MM Proposition II,without taxes,is A)R₀ = R_S + (B / S)(R_S - R_B). B)R_WACC = R_S - R_B. C)R_s = R₀ + (B / S)(R₀ - R_B). D)R₀ = R_B - R₀. E)R_WACC = R₀ + R_B.

Question

Quizplus · Accepted Answer

MM Proposition II without taxes states that the cost of equity (RS) is equal to the cost of debt (RS) plus a risk premium that is proportional to the company's debt-to-equity ratio (B/S). The formula associated with this proposition is R₀ = R_s + (B / S)(R_s - R_B), which is equivalent to option C. Option A is similar but has an error in the first term. Option B is associated with MM Proposition I, not II. Option D has the terms in the wrong order. Option E is not a valid formula for MM Proposition II.

The Formula Associated with MM Proposition II,without Taxes,is