Review the situation and answer the questions that follow: An analyst has graphed the relationship between the expected return on a firm's capital and its debt-equity (D/E) ratio. Her graph follows: From what you see on the graph, which of the following assumptions is consistent with the graph? The firm's debt has no default risk. If leverage increases, the cost of equity increases enough to keep the weighted average cost of capital constant. Excessive financial leverage causes equity to become less risky than debt. Excessive financial leverage causes a decrease in the firm's EBIT. Based on the assumption that a firm operates in a tax-free world, Modigliani and Miller made an important proposition about the value of a levered portfolio or company (V_L) and an unlevered portfolio or firm (V_U). Which of the following equations best represents the conclusion from the MM: No Tax theory? V_L = S_L + D V_L = S_L = D V_U notequalto V_L V_U = S_L - D