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.

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Definitions:

Conclusion

The final part of something, notably an argument or text, where the main points are resolved or summarized.

Evidence

Evidence refers to information, facts, or data presented to support a claim, assertion, or hypothesis.

Generalization

A broad statement or conclusion that applies to many instances, derived from specific cases.

Positive Instance

An item that belongs to a given class and possesses the trait attributed to the class by a given generalization.