Which one of the following is an implication of M&M Proposition II without taxes?
A)A firm's optimal capital structure is 100 percent debt.
B)WACC is unaffected by the capital structure of a firm.
C)WACC decreases as the debt-equity ratio increases.
D)A firm's capital structure is irrelevant.
E)The risk of equity is affected by both financial and operating leverage.

Question

Quizplus · Accepted Answer

M&M Proposition II without taxes states that the cost of equity increases with the debt-equity ratio, reflecting the increased financial risk, thus affecting the risk of equity.

Which One of the Following Is an Implication of M&M