M&M's Proposition II suggests that in a world of no taxes and no bankruptcy,________.
A)no matter what the debt-equity ratio is,the Ra or WACC of the firm increases with debt
B)the value of the firm is sensitive to the funding choice between debt and equity
C)in simple terms,as the firm adds more debt to the financing mix,the shareholders require a higher and higher return on equity such that it exactly offsets the use of the cheaper debt
D)Statements A,B,and C are all incorrect.

Question

Quizplus · Accepted Answer

M&M's Proposition II states that as a firm increases its debt, the required return on equity increases to offset the cheaper cost of debt, keeping the WACC constant in a no-tax, no-bankruptcy world.

M&M's Proposition II Suggests That in a World of No