Asked by Chelsea Lewis on May 04, 2024
Verified
In relation to M&M Proposition II with no taxes, financial risk is determined by the debt-equity ratio.
Debt-Equity Ratio
The ratio of a firm's total liabilities to its shareholders' equity, used to assess financial leverage.
Financial Risk
The possibility of losing money on an investment or business venture, often associated with the uncertainty of returns.
- Recognize the difference between business risk and financial risk, and their determinants.
Verified Answer
TA
Timothy AsuncionMay 09, 2024
Final Answer :
True
Explanation :
M&M Proposition II without taxes states that a company's cost of equity capital is a linear function of the company's debt-equity ratio, reflecting the increased financial risk taken on by equity holders as more debt is used.
Learning Objectives
- Recognize the difference between business risk and financial risk, and their determinants.
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