M&M Proposition II, without taxes, states that the:
A)capital structure of a firm is highly relevant.
B)weighted average cost of capital decreases as the debt-equity ratio decreases.
C)cost of equity increases as a firm increases its debt-equity ratio.
D)return on equity is equal to the return on assets multiplied by the debt-equity ratio.
E)return on equity remains constant as the debt-equity ratio increases.

Question

Quizplus · Accepted Answer

M&M Proposition II without taxes states that as a firm increases its debt-equity ratio, the cost of equity increases due to the higher financial risk associated with more debt.

M&M Proposition II, Without Taxes, States That The