MM Proposition II States That

question 62

Multiple Choice

MM Proposition II states that

• A)the expected return on equity is positively related to leverage.
• B)the required return on equity is a linear function of the firm's debt to equity ratio.
• C)the risk to equity increases with leverage.
• D)the expected return on equity is positively related to leverage, the required return on equity is a linear function of the firm's debt to equity ratio, and the risk to equity increases with leverage.

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Definitions:

Normal Profit

Normal profit is the minimum level of earnings necessary for a company to remain competitive in the market, covering its opportunity costs.

Market Equilibrium

A state where the supply of goods matches demand, leading to a stable price level for those goods.

Average Total Cost

The sum of all production expenses (both fixed and variable) divided by the overall output.

Total Variable Cost

The cumulative expenses that change in proportion to the level of goods or services produced.