In a perfect world of no taxes,which statement regarding MM propositions is true?
A)According to proposition I, a firm is able to find its optimal capital structure.
B)Proposition II implies that an increase in leverage raises the risk of equity and thereby the required return on equity.
C)According to proposition II, changes in the capital mix of a firm will not affect the debt and equity values of the firm.
D)Proposition I states that the total firm value critically depends on capital structure.

Question

Quizplus · Accepted Answer

Proposition II of Modigliani and Miller's theory states that in a world with no taxes, the cost of equity increases linearly as leverage increases, reflecting the increased risk taken on by equity holders.

In a Perfect World of No Taxes,which Statement Regarding MM