Modigliani and Miller (1958)

Discuss the notion of conservation of risk, the reduction of risk in one area is offset by increased risk in another area. As the firm makes capital structure changes, the total risk remains the same. Explain the effect on the cost of equity with the addition of leverage, does the cost of equity increase, decrease or remain constant? Why? What is the impact to the weighted cost of capital does it increase, decrease or remain constant? Why?

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