The cost of equity capital, based on M&M Proposition II, can be deﬁned as:
A) RE = RD + (RA - RD) (D/E).
B) RE = RA + (RA - RD) (E/D).
C) RE = RA + (RA - RD) (D/E).
D) RE = RA + (RD - RA) (E/D).
E) RE = RD - (RD - RA) (D/E).

Question

Quizplus · Accepted Answer

According to M&M Proposition II, which assumes no taxes, the cost of equity capital (RE) can be calculated using the following formula: RE = RA + (RA - RD) (D/E). This formula takes into account the risk of the company's assets (RA) and the cost of debt capital (RD), as well as the company's debt-to-equity ratio (D/E). Therefore, the correct choice is C.

The Cost of Equity Capital, Based on M&M Proposition II