M&M 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

M&M Proposition II states that a firm's cost of equity is a positive linear function of the firm's capital structure, meaning that as a firm increases its debt, the cost of equity increases due to the higher financial risk.

M&M Proposition II Is the Proposition That