The proposition that the cost of equity is a positive linear function of capital structure is called:
A)the capital asset pricing model.
B)MM Proposition I.
C)MM Proposition II.
D)the law of one price.
E)the eﬃcient markets hypothesis.

Question

Quizplus · Accepted Answer

MM Proposition II states that the cost of equity is a positive linear function of capital structure, meaning that as a company's debt-to-equity ratio increases, so does its cost of equity. This proposition is based on the assumption that the cost of debt is lower than the cost of equity and that investors adjust their required return on equity as a result of changes in a company's capital structure. The other options (A, B, D, and E) are not directly related to the relationship between cost of equity and capital structure.

The Proposition That the Cost of Equity Is a Positive