Under MM Proposition II with no taxes, the return on assets Blank______ as debt increases.Multiple choice question.is unchangedincreasesdecreases

Break Down the Problem

1. We need to understand the Modigliani-Miller Proposition II in a no-tax scenario.
2. We should analyze how the return on assets (ROA) behaves as debt increases.

Relevant Concepts

1. Modigliani-Miller Proposition II: This theorem suggests that under the assumption of no taxes and perfect capital markets, the cost of equity increases linearly with the level of debt. However, the overall cost of capital remains unchanged.

Analysis and Detail

1. As debt increases, the financial risk associated with equity increases, leading to a higher required return on equity.
2. The return on assets is based on the average cost of capital (which remains constant under MM Proposition II), meaning that while the equity cost increases, the average cost of capital does not change.

Verify and Summarize

1. In a no-tax environment, although the cost of equity increases with higher debt, this does not affect the return on assets, which remains constant since the average costs of capital stay the same.

Final Answer

Unchanged.