MM Proposition II,without taxes,is the proposition that
A)supports the argument that the capital structure of a firm is irrelevant to the value of the firm.
B)a firm's cost of equity increases in direct relationship to the increase in debt.
C)the cost of levered equity is determined solely by the return on debt,the debt-equity ratio,and the tax rate.
D)the cost of equity depends on the market value of the firm's assets.
E)supports the argument that the size of the pie does not depend on how the pie is sliced.

Question

Quizplus · Accepted Answer

MM Proposition II without taxes states that a firm's cost of equity increases as the firm increases its leverage (debt). This is because equity holders demand a higher return as the risk associated with their investment increases with higher debt levels.

MM Proposition II,without Taxes,is the Proposition That