Given that rational investors are risk averse, the cost of debt will generally be lower than the cost of
equity; however, M&M Proposition I states that replacing equity with debt will not change the value
of the ﬁrm. Explain.

Question

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The Answer of Given that rational investors are risk averse, the cost of debt will generally be lower than the cost of
equity; however, M&M Proposition I states that replacing equity with debt will not change the value
of the ﬁrm. Explain.

Given That Rational Investors Are Risk Averse, the Cost of Debt