As financial risk increases so too does the cost of equity.

Financial Risk

Financial Risk refers to the possibility of losing money on financial investments or transactions due to market fluctuations, credit issues, or other factors.

Cost of Equity

The return a company requires to decide if an investment meets capital return requirements.

Gain an understanding of how leverage influences the cost of equity, following the Modigliani and Miller Proposition II in a no-tax context.

Verified Answer

Shaun MlangeniMay 15, 2024

Final Answer :

True

Explanation :

As financial risk increases, investors demand a higher return for the increased risk they are taking on, which leads to an increase in the cost of equity.

Learning Objectives

Gain an understanding of how leverage influences the cost of equity, following the Modigliani and Miller Proposition II in a no-tax context.

As financial risk increases so too does the cost of equity.

Definitions

Learning Objectives

Learning Objectives

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