MM Proposition II with no taxes supports the argument that a firm's:
A)unlevered equity is risk-free.
B)cost of equity is inversely related to the firm's debt-equity level.
C)cost of equity is unaffected by the firm's unlevered cost of capital.
D)WACC will exceed the unlevered firm's cost of equity.
E)WACC remains constant even if the firm changes its capital structure.

Question

Quizplus · Accepted Answer

MM Proposition II without taxes posits that the Weighted Average Cost of Capital (WACC) of a firm remains constant regardless of the firm's capital structure. This is because any increase in debt (which is cheaper than equity) is offset by an increase in the cost of equity, due to the increased financial risk from leveraging.

MM Proposition II with No Taxes Supports the Argument That