MM Proposition II is the proposition that:
A)supports the argument that the capital structure of a ﬁrm is irrelevant to the value of the ﬁrm.
B)the cost of equity depends on the return on debt, the debt-equity ratio and the tax rate.
C)a ﬁrm's cost of equity capital is a positive linear function of the ﬁrm's capital structure.
D)the cost of equity is equivalent to the required return on the total assets of a ﬁrm.
E)supports the argument that the size of the pie does not depend on how the pie is sliced.

Question

Quizplus · Accepted Answer

MM Proposition II posits 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, its cost of equity also increases. This reflects the increased risk to equity holders as more debt is taken on.

MM Proposition II Is the Proposition That