Which one of the following states that a firm's cost of equity capital is directly and proportionally related to the firm's capital structure?
A)Capital Asset Pricing Model
B)M & M Proposition I
C)M & M Proposition II
D)Law of One Price
E)Efficient Markets Hypothesis

Question

Quizplus · Accepted Answer

M & M Proposition II states that a firm's cost of equity capital is a linear function of the firm's capital structure. This proposition, part of the Modigliani-Miller theorem on corporate finance, suggests that as a firm increases its leverage, its cost of equity also increases linearly due to the higher risk perceived by equity investors.

Which One of the Following States That a Firm's Cost