Which one of the following states that the cost of equity capital is directly and proportionally related to capital structure?
A) Static theory of capital structure
B) M&M Proposition I
C) M&M Proposition II
D) Homemade leverage
E) Pecking-order theory

Question

Quizplus · Accepted Answer

M&M Proposition II states that the cost of equity capital is directly and proportionally related to the company's capital structure. This proposition, part of the Modigliani-Miller theorem, suggests that as a firm increases its leverage, the cost of equity increases linearly to compensate for the increased risk.

Which One of the Following States That the Cost of Equity