Which of the following is the best definition of M&M Proposition II?
A) The tax saving attained by a firm from interest expense.
B) Termination of the firm as a going concern.
C) The value of the firm is independent of its capital structure.
D) A firm's cost of equity capital is a positive linear function of its capital structure.
E) Financial restructuring of a failing firm to attempt to continue operations as a going concern.

Question

Quizplus · Accepted Answer

M&M Proposition II states that a firm's cost of equity capital is a positive linear function of its capital structure, meaning that as a firm increases its leverage (debt), its cost of equity also increases. This is because equity holders demand a higher return as the risk associated with higher leverage increases.

Which of the Following Is the Best Definition of M&M