As the debt ratio of a firm increases, its equity beta increases because of the added financial risk.

True

False

QUESTION 14

MM's proposition I under no taxes implies that the cost of equity of a firm remains the same as the firm uses more debt because of the no-tax assumption.

True

False

QUESTION 15

MM's proposition I under no taxes implies that an issue of debt increases both the expected earnings per share (EPS) and the risk of the EPS. As a result, the stock price remains the same.

True

False