Question

Which of the following statements is FALSE? A. Modigliani and Miller's conclusion verified the common view, which stated that even with perfect capital markets,leverage would affect a firm's value. B.

We can evaluate the relationship between risk and return more formally by computing the sensitivity of each security's return to the systematic risk of the economy. C. Investors in levered equity require a higher expected return to compensate for its increased risk. D. Leverage increases the risk of equity even when there is no risk that the firm will default.

Fig: 1

Fig: 2