MM Proposition II,without taxes,implies that the required return on equity is
A)a result of homemade leverage.
B)inversely related to the firm's debt-to-equity ratio.
C)directly affected by the firm's debt-to-equity ratio.
D)independent of the firm's capital structure.
E)a linear function of the market's rate of interest.

Question

Quizplus · Accepted Answer

MM Proposition II without taxes states that the cost of equity is a linear function of the company's debt-to-equity ratio. This means that as a firm takes on more debt relative to equity, the required return on equity increases due to the higher financial risk perceived by equity investors.

MM Proposition II,without Taxes,implies That the Required Return on Equity