Which of the following statements are correct in relation to MM Proposition II with no taxes?
I.The return on assets is equal to the weighted average cost of capital.
II.Financial risk is determined by the debt-equity ratio.
III.Financial risk determines the return on assets.
IV.The cost of equity declines when the amount of leverage used by a firm rises.
A)I and III only
B)II and IV only
C)I and II only
D)III and IV only
E)I and IV only

Question

Quizplus · Accepted Answer

I is correct under MM Proposition II with no taxes as it states that the return on assets is equal to the weighted average cost of capital. 
II is also correct as financial risk, determined by the debt-equity ratio, affects the cost of capital. 
III and IV are incorrect as financial risk does not determine the return on assets, and the cost of equity actually increases when leverage is used, making option IV false.

Which of the Following Statements Are Correct in Relation to MM