The proposition that the cost of equity is a positive linear function of capital structure is called:
A)the capital asset pricing model.
B)MM Proposition I.
C)MM Proposition II.
D)the law of one price.
E)the efficient market hypothesis.

Question

Quizplus · Accepted Answer

MM Proposition II states that the cost of equity is a positive linear function of capital structure, meaning that as a company takes on more debt, the cost of equity will increase due to the increased risk to equity holders. The other options listed are different financial theories and models.

The Proposition That the Cost of Equity Is a Positive