M&M Proposition II is the proposition that:
A) The value of a ﬁrm is independent of the ﬁrm's capital structure.
B) States the value of a ﬁrm is dependent upon the interest tax shield.
C) The levered value of a ﬁrm is equal to the unlevered value plus the interest tax shield.
D) A ﬁrm's cost of equity capital is a positive linear function of the ﬁrm's capital structure.
E) The levered value of a ﬁrm is equal to the unlevered value plus the present value of the interest tax shield.

Question

Quizplus · Accepted Answer

M&M Proposition II states that a firm's cost of equity capital increases linearly with its debt-equity ratio, reflecting the increased risk to equity holders as leverage increases.

M&M Proposition II Is the Proposition That