Which one of the following statements related to the M&M Propositions is correct

Question

Which one of the following statements related to the M&M Propositions is correct?

a. M&M Proposition I, with taxes, implies that the capital structure of a tax-paying firm is irrelevant.
b. M&M Proposition I, with taxes, implies that the WACC of a firm remains constant even if the capital structure is changed.
c. M&M Proposition I, with taxes, implies that WACC decreases as the debt-equity ratio increases.
d. M&M Proposition II, without taxes, implies that the cost of equity remains constant as a firm increases its debt-equity ratio.

Explanation / Answer

c. M&M Proposition I, with taxes, implies that WACC decreases as the debt-equity ratio increases.

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