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

question 59

Multiple Choice

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 R_a 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 through C are all incorrect.

---

Definitions:

Demographic Information

Statistical data relating to the population and particular groups within it, including age, race, gender, income, education, and employment.

Ethnic Background

Refers to an individual's cultural heritage, including nationality, lineage, ancestry, and language.

Family Educational Rights and Privacy Act

A federal law in the United States that aims to protect the privacy of student education records, giving parents specific rights with respect to their children's education records until the age of 18, when these rights transfer to the students.