Answer: B. The cost of equity rises as leverage rises.
Explanation:
Cost of Equity in finance is expressed as the rate of return a firm theoretically pays its investors (equity investor) for the risk they bear for investing their capital. It is the theoretical cost to compensate equity investors for undertaking risk.
As leverages increases the cost theoretical cost pay to equity investors increase.
The MM proposition with no tax support the argument that "equity cost rises as leverage rises".
