M&M Proposition II, without taxes, is the proposition that:
A) the capital structure of a company has no effect on that company's value.
B) the cost of equity depends on the return on debt, the debt-equity ratio, and the tax rate.
C) a company's cost of equity is a linear function with a slope equal to (RA − RD).
D) the cost of equity is equivalent to the required rate of return on assets.
E) the size of the pie does not depend on how the pie is sliced.

Question

Quizplus · Accepted Answer

M&M Proposition II without taxes states that a company's cost of equity is a linear function of its capital structure. The slope of this function is determined by the difference between the return on assets (RA) and the cost of debt (RD), indicating how the cost of equity increases as more debt is introduced into the capital structure. This proposition does not involve taxes, making options involving tax rates or the tax implications on capital structure irrelevant.

M&M Proposition II, Without Taxes, Is the Proposition That