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.

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