M&M Proposition 2: Suppose a Firm Has a Cost of Equity

question 10

Multiple Choice

M&M Proposition 2: Suppose a firm has a cost of equity of 12%, a D/E or 1/6, and the YTM on its bonds is 7.5%. The risk-free rate is currently 3%. What is the current required rate of return on its assets and equity if the D/E is changed to 1/3?

• A) 11.35% and 13.25%
• B) 11.35% and 8.25%
• C) 13.25% and 11.35%
• D) None of the above.

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A country in Western Europe known for its historic cities, art treasures, and diverse regions.

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A societal framework that emphasizes mutual respect and the inherent value of all individuals, often contrasted with honor or victim cultures.

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A cultural orientation where individuals see themselves as part of a larger group and emphasize equality and shared goals.