Asked by Erinn Whitlock on Jun 25, 2024
Verified
In relation to M&M Proposition II with no taxes, financial risk determines the return on assets.
M&M Proposition II
A theory by Modigliani and Miller that suggests the cost of equity is a linear function of the company's debt/equity ratio, under a no-tax environment.
Financial Risk
The possibility of losing money on an investment or business venture due to various financial factors.
Return on Assets
An indicator of how profitable a company is relative to its total assets, calculated as net income divided by total assets.
- Comprehend the fundamentals of Modigliani and Miller's concepts concerning capital structure, taxation, and capital costs.
Verified Answer
MW
Matayiah WhiteJun 29, 2024
Final Answer :
False
Explanation :
M&M Proposition II with no taxes states that the cost of equity increases with financial leverage due to the increased risk borne by equity holders, but it does not imply that financial risk determines the return on assets. The return on assets is determined by the firm's operating performance, not its capital structure.
Learning Objectives
- Comprehend the fundamentals of Modigliani and Miller's concepts concerning capital structure, taxation, and capital costs.