M&M Proposition I, without taxes, states that: O the cost of equity rises when financial leverage rises. O the weighted average cost of capital is constant. O firms should borrow to the point where the tax benefit from debt is equal to the cost of the increased probability of financial distress. E it is completely irrelevant how a firm arranges its finances. Question 2 The theory that the value of a firm is independent of its capital structure is referred to as: O the static theory of capital structure. O M&M Proposition 1. O M&M Proposition II. O the observed value of the capital structure. accounting solvency. Question 3 en LMC 4 pts SA 4 pts