According to ___________, a ﬁrm's cost of equity increases with greater debt ﬁnancing, but the WACC remains unchanged.
A) M&M Proposition I with taxes.
B) M&M Proposition I without taxes.
C) The static theory of capital structure.
D) M&M Proposition II without taxes.
E) M&M Proposition II with taxes.

Question

Quizplus · Accepted Answer

According to M&M Proposition II without taxes, the cost of equity increases with more debt due to higher financial risk, but the WACC remains unchanged because the benefits of debt are offset by the increased cost of equity.

According to ___________, a ﬁRm's Cost of Equity Increases with Greater