Which of the following are the two component parts of a ﬁrm's cost of equity as illustrated by M&M Proposition II?
A) Financial risk and interest rate risk.
B) Inﬂation risk and interest rate risk.
C) Tax risk and interest rate risk.
D) Business risk and market risk.
E) Business risk and ﬁnancial risk.

Question

Quizplus · Accepted Answer

According to M&M Proposition II, a firm's cost of equity is composed of two component parts: business risk and financial risk. Business risk is the risk associated with a firm's operations and market conditions, while financial risk is related to the firm's use of debt and other financial instruments. Inflation risk, tax risk, and interest rate risk are not the two component parts of a firm's cost of equity as per M&M Proposition II.

Which of the Following Are the Two Component Parts of a ﬁRm's