M&M Proposition 2 states that the cost of a firm's common stock is related to

Question

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M&M Proposition 2 states that the cost of a firm's common stock is related to both the debt-to-equity ratio and the required rate of return on the firm's underlying assets. Therefore, the correct choice is (D) as it includes both options. The cost of common stock increases with the debt-to-equity ratio, as the company becomes more risky, and is also affected by the required rate of return on the firm's underlying assets, as this reflects the level of risk in the company's operations.

M&M Proposition 2 States That the Cost of a Firm's