M&M Proposition 2 states that the required rate of return on a firm's stock is related to the debt-to-equity ratio.

Question

Quizplus · Accepted Answer

According to Modigliani and Miller's Proposition 2, the required rate of return on a firm's stock increases as the debt-to-equity ratio increases. This is because higher debt levels increase the financial risk of the firm, and investors demand a higher return to compensate for that added risk.

M&M Proposition 2 States That the Required Rate of Return