7. Response question:

Nobel winners Modigliani and Miller (M&M) demonstrated that leverage leads to increase in risk borne by equity. Increased risk justifies higher returns for equity. They expressed this relationship in Proposition II.

Recently, there have been new developments in the world of corporate debt. Many firms can offer Government-Guaranteed-Bonds. Ford is one example among many others. What is the direct impact of such a Government-Guaranteed-Debt on the cost of equity capital? For example, Fords cost of equity would rise, be lowered or remain unchanged with these bonds relative to regular bonds without guarantee? What is the impact of such government guarantee on the cost of equity?

(Brief response. 10 words, or less. You can express it qualitatively or as a formula. Limit your response to the M&M world of deliberately restrictive assumptions and just focus on risk and return. Ignore information effects, distress costs, agency costs etc.)