According to Modigliani and Miller Proposition II, since the expected rate of return on debt is less than the expected rate of return on equity, the weighted average cost of capital declines as more debt is issued.

Question

Quizplus · Accepted Answer

According to Modigliani and Miller Proposition II, the cost of equity increases with more debt because of the higher risk of default, but the overall weighted average cost of capital (WACC) remains constant, assuming no taxes and perfect markets.

According to Modigliani and Miller Proposition II, Since the Expected