According to M&M’s Proposition II the expected return on a levered firm’s equity: a. Falls to...
According to M&M’s Proposition II the expected return on a levered firm’s equity:
a. Falls to the debt-to-equity ratio
b. The levered firm’s equity expect return does not change with the debt-to-equity level
c. Rises with the debt-to-equity ratio Rises with the debt-to-equity ratio
d. Proposition II does not address the leveraged firm’s expected return on equity
Homework Answers
Ans c. Rises with the debt-to-equity ratio
According to M&M’s Proposition II the expected return on a levered firm’s equity Rises with the debt-to-equity ratio. M&M’s Proposition is one of the most important of theorem in corporate finance. It was developed in 1958 by Miller and Modigliani who also developed its 2nd version which included taxes, asymmetric information, bankruptcy costs.
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