According to MM Proposition II with no taxes,the:
A)return on assets is determined by financial risk.
B)required return on equity is a linear function of the firm's debt-equity ratio.
C)cost of equity in inversely related to the firm's debt-equity ratio.
D)cost of debt must equal the cost of equity.
E)required return on assets exceeds the weighted average cost of capital.

Question

Quizplus · Accepted Answer

MM Proposition II states that the required return on equity is a linear function of the firm's debt-equity ratio. This means that as the firm takes on more debt, the required return on equity will increase in a linear fashion. However, this proposition assumes that there are no taxes, which is not a realistic assumption in the real world.

According to MM Proposition II with No Taxes,the