Consider the following equation for the question(s)below:
E + D = U = A
-Which of the following statements is FALSE?
A)The total market value of the firm's securities is equal to the market value of its assets, whether the firm is unlevered or levered.
B)We can use MM Proposition I to derive an explicit relationship between leverage and the equity cost of capital.
C)While debt itself may be cheap, it increases the risk and therefore the cost of capital of the firm's equity.
D)Although debt does not have a lower cost of capital than equity, we can consider this cost in isolation.

Question

Quizplus · Accepted Answer

This statement is false because debt typically has a lower cost of capital than equity due to the tax deductibility of interest payments. However, it is still generally not advisable to consider the cost of debt in isolation, as increasing leverage can also increase the risk and cost of equity capital.

Consider the Following Equation for the Question(s)below