Leverage leads to increase in risk borne by equity

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Reference no: EM131501409

Nobel winner Mongliani and Miller (M&M) demonstrated that leverage leads to increase in risk borne by equity. Increased risk justifies higher returns on equity. They expressed this realtionship in preposition II.

Recently there have been new development in the words corporate debt, In Particular, now many firms are able to 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, for example Ford's equity cost of capital.( brief response 25 words or less. Can express it quantitatively or as a formula. Limit response to M&M word deliberately restrictive assumption and just focus on risk and return. In particular ignore information effects, distress cost, agency cost, etc.)

Reference no: EM131501409

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