Which one of the following states that a firm’s cost of equity capital is a positive linear function of the firm' s capital structure?
A)Static theory of capital structure
B)M& M Proposition I without taxes
C)M& M Proposition II without taxes
D)Homemade leverage theory
E)M& M Proposition I with taxes

Question

Which one of the following states that a firm&#8217;s cost of equity capital is a positive linear function of the firm' s capital structure?
A)Static theory of capital structure
B)M& M Proposition I without taxes
C)M& M Proposition II without taxes
D)Homemade leverage theory
E)M& M Proposition I with taxes

Quizplus · Accepted Answer

M&M Proposition II without taxes states that the cost of equity for a levered firm is equal to the cost of equity for an unlevered firm plus a premium for the financial risk assumed by the equity holders. This premium is proportional to the amount of debt in the firm's capital structure, making the cost of equity a positive linear function of the firm's capital structure.

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