M&M's Proposition II suggests that in a world of no taxes and no bankruptcy, ________
A) no matter what the debt-equity ratio is, the Ra or WACC of the firm increases with debt
B) the value of the firm is sensitive to the funding choice between debt and equity
C) in simple terms, as the firm adds more debt to the financing mix, the shareholders require a higher and higher return on equity such that it exactly offsets the use of the cheaper debt
D) Statements A, B, and C are all incorrect.
Answer: C
Explanation: C) No matter what the debt-equity ratio is, the Ra or WACC of the firm DOES NOT CHANGE.
The value of the firm is INSENSITIVE to the funding choice between debt and equity.
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