M&M Proposition 1 states that the capital structure of a firm does not affect the required rate of return on a firm's assets, while M&M Proposition 2 shows that the required rate of return on firm's equity does change with capital structure decisions.

Question

Quizplus · Accepted Answer

This is the correct statement of M&M Proposition 1 and 2. M&M Proposition 1 argues that the capital structure of a firm does not impact the required rate of return on a firm's assets, and M&M Proposition 2 states that the cost of equity increases as the proportion of debt increases in the capital structure.

M&M Proposition 1 States That the Capital Structure of a Firm