Which one of the following statements is correct in relation to M&M Proposition
ID: 2744833 • Letter: W
Question
Which one of the following statements is correct in relation to M&M Proposition II, without taxes?
The required return on assets is equal to the weighted average cost of capital.
The cost of equity is inversely related to the debt-equity ratio.
The cost of equity remains constant as the debt-equity ratio increases.
Financial risk is unaffected by the debt-equity ratio.
Financial risk determines the return on assets.
M&M Proposition I with tax implies that:
A firm's weighted average cost of capital decreases as the firm's debt-equity ratio increases.
The value of a firm is inversely related to the amount of leverage used by the firm.
The value of an unlevered firm is equal to the value of a levered firm plus the value of the interest tax shield.
A firm's cost of capital is the same regardless of the mix of debt and equity used by the firm.
A firm's cost of equity increases as the debt-equity ratio of the firm decreases.
Explanation / Answer
Which one of the following statements is correct in relation to M&M Proposition II, without taxes?
Answer: The required return on assets is equal to the weighted average cost of capital.
As per M&M Proposition II, without taxes, the required return on assets is equal to the weighted average cost of capital.
M&M Proposition I with tax implies that:
Answer : A firm's weighted average cost of capital decreases as the firm's debt-equity ratio increases.
Due to tax impact the the Cost of Debt decreases,which ultimately leased to decrease in weighted average cost of capital.
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