Briefly discuss the relationship between cost of equity & Financial Leverage in accordance with M&M Proposition .
Answer (1)
Student Expert
16th Mar, 2020
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The second proposition for the real-world condition gives the required relationship
The second proposition says that financial leverage is in direct proportion to the cost of equity. With an increase in the debt component, the equity shareholders perceive a higher risk to the company. Hence, in return, the shareholders expect a higher return, thereby increasing the cost of equity.
Thank you
The second proposition for the real-world condition gives the required relationship
The second proposition says that financial leverage is in direct proportion to the cost of equity. With an increase in the debt component, the equity shareholders perceive a higher risk to the company. Hence, in return, the shareholders expect a higher return, thereby increasing the cost of equity.
Thank you
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