Asked by Olivia Anne Samonte on Jul 13, 2024
Verified
M&M Proposition II is the proposition that:
A) The value of a firm is independent of the firm's capital structure.
B) States the value of a firm is dependent upon the interest tax shield.
C) The levered value of a firm is equal to the unlevered value plus the interest tax shield.
D) A firm's cost of equity capital is a positive linear function of the firm's capital structure.
E) The levered value of a firm is equal to the unlevered value plus the present value of the interest tax shield.
M&M Proposition II
A theory in corporate finance that suggests a company's cost of equity capital is a linear function of its capital structure, under a no-tax scenario.
Interest Tax Shield
The savings in income tax that a company achieves through deducting its interest expense from its taxable income.
- Examine the function of debt within the capital structure and its impact on the value of a firm, encompassing Modigliani-Miller propositions.
Verified Answer
LS
Leandro Santana isaacJul 15, 2024
Final Answer :
D
Explanation :
M&M Proposition II posits that a firm's cost of equity capital is a positive linear function of its capital structure, meaning as a firm increases its leverage, its cost of equity also increases.
Learning Objectives
- Examine the function of debt within the capital structure and its impact on the value of a firm, encompassing Modigliani-Miller propositions.