Asked by
sabrina kurtishi
on Nov 07, 2024
Verified
Which of the following are the two component parts of a firm's cost of equity as illustrated by M&M Proposition II?
A) Financial risk and interest rate risk.
B) Inflation risk and interest rate risk.
C) Tax risk and interest rate risk.
D) Business risk and market risk.
E) Business risk and financial risk.
M&M Proposition II
A theory in corporate finance that suggests the cost of equity increases with higher debt levels, keeping the company's value unchanged if taxes are not considered.
Financial Risk
The hazard of suffering financial loss through an investment or business endeavor.
Business Risk
encompasses the potential for a firm's operational or financial performance to suffer due to internal or external factors, impacting profitability and viability.
- Understand the principles of Modigliani and Miller regarding the composition of capital in environments with and without taxes.
- Examine how financial leverage impacts a company's equity cost and its inherent risk.
Verified Answer
TF
Learning Objectives
- Understand the principles of Modigliani and Miller regarding the composition of capital in environments with and without taxes.
- Examine how financial leverage impacts a company's equity cost and its inherent risk.