 MM propositions 1 and 2 assume that under perfect capital markets, the leverage does not affect the firm's value or its overall cost of capital. However, there are two incorrect arguments that are cited in the favour of leverage. The first incorrect argument or the fallacy is that the leverage should also raise the firm's stock price. Now see how this argument can be proved or it may not be proved. We have an example of LVI which is an all-equity firm. It has an expected earning before interest and tax of 10 million. Its outstanding shares of 10 million share market value is $7.5 each. Its planned borrowing is $15 million with the cost of borrowing of 8% and the share repurchase program is by 2 million shares whereas the share repurchase price is set at $7.5 each. Now if we compute earnings per share without debt or leverage it comes to $1 per share and if we compute earnings per share using the effect of debt then earnings per share is equal to $1.1 so apparently with the increase of debt or with the induction of leverage there is an increase in the earnings per share. So as the earnings per share is increased so it is assumed that the market value per share might also be increased but there is a contradiction that MM1 says that for fairly priced securities such financial transaction that is the debt transaction have a zero NPV and as there is a zero NPV on this type transaction so it will not give any benefit to the firm's shareholders. Now how to reconcile this inaccurate argument having the contradictory results to answer these reconciliation we see that we have to count for the riskiness of the leverage as a consequence on the riskiness on the earnings per share in our earlier example we took only the riskiness that the EPS has been changed and that we did not take into our example. Now to reconcile any contradiction we need to consider the riskiness on the EPS that has been increased due to the leverage effect suppose that the earnings before interest and tax is equal to four million dollars only then we see that EPS without debt is point four dollars whereas EPS without debt is point three five dollars. Now we see that the earnings has been decreased and with these low earnings leverage will cause EPS to fall. So this means that to determine the effect of leverage on EPS we have to consider multiple scenarios in order to come on up reasonable conclusion.