M&M Proposition 2: Using the information for Bellamee from Question 64, what is its required return on equity if its debt-to-equity ratio changes to 2/5 and this increases the required rate of return on their debt to 7%?

Question

Quizplus · Accepted Answer

According to M&M Proposition 2, the required return on equity increases with leverage. Given the debt-to-equity ratio of 2/5 and a required return on debt of 7%, the required return on equity can be calculated using the formula: Re = Ra + (Ra - Rd) * (D/E). Assuming Ra is constant, the calculation aligns with option A.

M&M Proposition 2: Using the Information for Bellamee from Question