Consider the following equation for the question(s) below.

-Which of the following statements is FALSE?
A) While debt itself may be cheap, it increases the risk and therefore the cost of capital of the firm's equity.
B) Although debt does not have a lower cost of capital than equity, we can consider this cost in isolation.
C) We can use MM Proposition I to derive an explicit relationship between leverage and the equity cost of capital.
D) The total market value of the firm's securities is equal to the market value of its assets, whether the firm is unlevered or levered.

Question

Consider the following equation for the question(s) below.
 
-Which of the following statements is FALSE?
A) While debt itself may be cheap, it increases the risk and therefore the cost of capital of the firm's equity. 
B) Although debt does not have a lower cost of capital than equity, we can consider this cost in isolation. 
C) We can use MM Proposition I to derive an explicit relationship between leverage and the equity cost of capital. 
D) The total market value of the firm's securities is equal to the market value of its assets, whether the firm is unlevered or levered.

Quizplus · Accepted Answer

B) Although debt has a lower cost of capital than equity, we can consider this cost in isolation.

Consider the Following Equation for the Question(s) Below