Assume perfect capital markets $($assumptions of Modigliani & Miller

without taxes$).$ Suppose that a firm issues debt and pays out the proceeds as a

dividend. Suppose the debt beta and the asset beta are unaffected by this change, and

the asset beta is larger than the debt beta. The firm$$s required return on equity re

will...

a$.$ Decrease, because equity investors now get safe cash.

b$.$ Increase, because the firm now faces lower expected bankruptcy costs.

c$.$ Decrease, because the financial risk of the equity falls.

d$.$ None of the above.