Question

MM Proposition II with taxes: Group of answer choices explains how a firm's WACC increases with the use of financial leverage. reveals how utilizing the tax shield on debt causes an increase in the value of a firm. supports the argument that business risk is determined by the capital structure employed by a firm. supports the argument that the cost of equity decreases as the debt-equity ratio increases. reaches the final conclusion that the capital structure decision is irrelevant to the value of a firm.

Answer 1

explains how a firm's WACC increases with the use of financial leverage.

Step-by-step explanation:

According to the MM Proposition II with taxes, the cost of equity rises with the increases use of debt in the capital structure of a firm.

`r_(e)` =
`r_(o) +( r_(o) - r_(d) )` ×
`(D)/(E)`

As cost of equity increases, the firm's WACC increases also

The MM Proposition I with taxes reveals how utilizing the tax shield on debt causes an increase in the value of a firm