MM's proposition II states that the required return on equity increases as the firm's debt-equity ratio increases.

Name: MM's proposition II states that the required return on equity increases as the firm's debt-equity ratio increases.
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Question

Quizplus · Accepted Answer

MM's proposition II, also known as the capital structure irrelevance principle, states that the cost of equity increases with leverage or the debt-equity ratio due to the increased financial risk perceived by investors. Therefore, option A is correct.

MM's Proposition II States That the Required Return on Equity