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

question 36

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 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.