). Answer the following questions briefly.

1. (10) M&M Propositions How would you answer the following debate?

Q1: Isnt it true that the riskiness of a firms equity will rise if the firm increases its use of debt financing?

A1: Yes or No?__________

Q2: And isnt it true that, as a firm increases its use of borrowing, the likelihood of default increases, thereby increasing the risk of the firms debt?

A2: Yes or No?__________

Q3: In other words, increased borrowing increases the risk of the equity and the debt?

A3: Yes or No?__________

Q4: Well, given that the firm uses only debt and equity financing, and given that the risks of both are increased by increased borrowing, does it not follow that increasing debt increases the overall risk of the firm and therefore decreases the value of the firm?

A4:(Explain) ________________________________________________________________