M&M Proposition II is the proposition that:
A) The value of a firm is independent of the firm's capital structure.
B) States the value of a firm is dependent upon the interest tax shield.
C) The levered value of a firm is equal to the unlevered value plus the interest tax shield.
D) A firm's cost of equity capital is a positive linear function of the firm's capital structure.
E) The levered value of a firm is equal to the unlevered value plus the present value of the interest tax shield.

Question

Quizplus · Accepted Answer

M&M Proposition II posits that a firm's cost of equity capital is a positive linear function of its capital structure, meaning as a firm increases its leverage, its cost of equity also increases.

M&M Proposition II Is the Proposition That