The theory that a change in the capital structure weights is exactly offset by the change in the cost of equity is known as:
A) Homemade leverage.
B) Financial leverage.
C) The targeted capital structure theory.
D) M&M Proposition I.
E) M&M Proposition II.

Question

Quizplus · Accepted Answer

M&M Proposition II states that the cost of equity increases with financial leverage because the risk to equity holders increases, offsetting the benefits of debt financing.

The Theory That a Change in the Capital Structure Weights