M&M Proposition II with no tax states that a firm's cost of equity is dependent upon the firm's cost of debt financing.

Question

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M&M Proposition II without taxes posits that a firm's cost of equity capital is a linear function of the firm's debt/equity ratio, indicating that as a firm increases its leverage, its cost of equity also increases to compensate equity holders for the increased risk.

M&M Proposition II with No Tax States That a Firm's