Chapter 16, Problem 2CRCT

Summary Introduction

To discuss: Whether the given information follows that raising the debt increases the total risk of the company, thereby reducing the firm’s value.

Introduction:

M&M proposition I is a proposition where the firm’s value is independent of the capital structure of the firm. M&M proposition II is a proposition where a company’s equity cost is a linear function that is positive with respect to the capital structure of the firm.