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Which of the following is False? a) Modigliani and Miller's conclusions in the presence of taxation, agree with the common view which states that leverage would affect a firm's value
Which of the following is False? a) Modigliani and Miller's conclusions in the presence of taxation, agree with the common view which states that leverage would affect a firm's value. b) Leverage increases the risk of equity even when there is risk that the firm may default. c) The expected return of equity increases in leverage, since investors require a higher expected return to compensate for the increased risk in asset return. d) Both a) and c).
Expert Solution
Leverage will not be increasing the risk of equity when there will already be a risk that the firm is defaulting so when there is already a risk that form is defaulting then, the financial distress element related to leverage will be eliminated and hence it can be said that leverage will not increase the risk of equity in such circumstances.
All the other statements are true.
Correct answer is option (B) Leverage increase the risk of equity even when there is a risk that firm may default.
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