Proposition II from M&M says that the cost of equity is a function of which of the items below?
A)The required return on assets (which is the same for firms with identical assets or investment choices)
B)The cost of debt
C)The debt-equity ratio of the firm
D)All of these

Question

Quizplus · Accepted Answer

Proposition II from M&M states that the cost of equity is a function of both the required return on assets and the debt-equity ratio of the firm. Additionally, the cost of debt also affects the overall cost of capital of the firm, which in turn affects the cost of equity. Therefore, all of the given options (A, B, and C) are factors that influence the cost of equity, making D the correct choice.

Proposition II from M&M Says That the Cost of Equity