Which of these statements apply MM Proposition II without taxes?
I.The expected return on equity is positively related to leverage.
II.The value of a firm cannot be changed by changing its capital structure.
III.Risk to equity holders increases with leverage.
IV.The expected return on equity is affected by the firm's debt-to-equity ratio.
A)II and IV only
B)I,II,and III only
C)I,III,and IV only
D)I and III only
E)I,II,III,and IV

Question

Quizplus · Accepted Answer

MM Proposition II without taxes states that the expected return on equity is positively related to leverage (I), risk to equity holders increases with leverage (III), and the expected return on equity is affected by the firm's debt-to-equity ratio (IV). Proposition II does not state that the firm's value is unaffected by capital structure, which is part of Proposition I.

Which of These Statements Apply MM Proposition II Without Taxes