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The Miller Modigliani theorem posits that debt policy is irrelevant, when it comes to firm...

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Finance

The Miller Modigliani theorem posits that debt policy is irrelevant, when it comes to firm value. Assume that you have a firm that is funded entirely with equity and has a beta (unlevered) of 0.90; the risk free rate is 3% and the equity risk premium is 6%. What will happen to the cost of capital, if the firm moves to a 30% debt ratio? (Remember that there are no taxes or default risk in the Miller Modigliani world)

a.

The cost of capital will go up

b.

The cost of capital will remain unchanged

c.

The cost of capital will go down

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