MM's proposition II states that the:
A) expected return on equity increases as financial leverage increases.
B) expected return on assets decreases as expected return on debt decreases.
C) firm's capital structure is irrelevant to value determination.
D) greater the proportion of equity, the higher the expected return on debt.

Question

Quizplus · Accepted Answer

According to MM's Proposition II, the expected return on equity increases with financial leverage due to the increased risk borne by equity holders.

MM's Proposition II States That The