EXERCISE 2 [30 marks] Indicate whether each of the following statements is true or false. Support your answers with the relevant explanations. A. Modigliani and Miller's Proposition II says that the cost of equity is independent of the firm's capital structure. (Explain your reasoning.) [6 marks] B. Modigliani and Miller's Proposition II assumes that increased borrowing does not affect the interest rate on the firm's debt. (Explain your reasoning.) [6 marks] C. Borrowing does not increase the firm's cost of capital only if there is no risk of bankruptcy. (Explain your reasoning.) [6 marks] D. In the presence of corporate taxes, a company would prefer to raise debt only when the benefits of the tax shield fully offset the cost of debt. (Explain your reasoning - in your explanation, provide a numerical example supporting your answer.) [6 marks] E. The CAPM implies that the expected rate of return changes linearly with the systematic risk. (Explain your reasoning.) [6 marks]