Question: Please explain M&M preposition II based on the graph below in particular in respect of the expected return on equity rE. (10 points) In addition,

Please explain M&M preposition II based on the graph below in particular in respect of the expected return on equity rE. (10 points) In addition, please provide a numerical example for your explanation focusing on the situation on the left side of the dotted line. (5 points)

Rates of return re= Expected return on equity A = Expected return

Rates of return re= Expected return on equity A = Expected return on assets rD= Expected return on debt Risk-free debt D debt Risky debt E equity

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