Suppose we wish to draw a graph illustrating M&M Proposition II. Let the vertical axis represent the
cost of capital and the ﬁrm's debt-to-equity ratio represents the horizontal axis. If the line
representing the ﬁrm's WACC has a negative slope, we must be incorporating taxes into the
analysis.

Question

Quizplus · Accepted Answer

M&M Proposition II incorporates taxes into the analysis, which results in a negative slope for the line representing the firm's WACC. Therefore, if the graph illustrating M&M Proposition II has a negative slope, it must be incorporating taxes.

Suppose We Wish to Draw a Graph Illustrating M&M Proposition