According to Proposition II of Modigliani-Miller theory of capital structure, which of the following statement is true?

Correct option is D

Proposition II of MM theory states that as a firm increases its financial leverage (debt-to-equity ratio), the expected return on equity increases. This happens because shareholders demand a higher return to compensate for the additional risk caused by higher debt levels.
Information Booster: Proposition II highlights that financial leverage magnifies both returns and risks to equity shareholders.
Additional Knowledge: While leverage increases returns for shareholders, excessive debt can lead to financial distress or bankruptcy.