M&M Proposition II with tax supports the argument that a firm's:
A) Cost of equity decreases as its weighted average cost of capital decreases.
B) Cost of equity increases as the firm increases its debt-equity ratio.
C) Cost of debt varies inversely with the debt-equity ratio.
D) Use of debt decreases the value of the firm.
E) Weighted average cost of the capital remains constant as the debt-equity ratio rises.

Question

Quizplus · Accepted Answer

M&M Proposition II with tax posits that the cost of equity increases as a firm leverages up (i.e., increases its debt-equity ratio), because equity holders demand a higher return to compensate for the increased risk associated with higher levels of debt.

M&M Proposition II with Tax Supports the Argument That a Firm's