According to ___________, a ﬁrm's cost of equity increases with greater debt ﬁnancing, and the WACC decreases.
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 with taxes, a firm's cost of equity increases with greater debt financing due to the higher risk associated with debt, but the overall weighted average cost of capital (WACC) decreases because of the tax shield benefit of debt.

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