The objective of the research reported in this dissertation is to conduct an empirical test of the hypothesis that, excluding income tax effects, the cost of capital to a firm is independent of the degree of financial leverage employed by the firm. This hypothesis, set forth by Franco Modigliani and Merton Miller in 1958, represents a challenge to the traditional view on the subject, a challenge which carries implications of considerable importance in the field of finance. The challenge has led to a lengthy controversy which can ultimately be resolved only by subjecting the hypothesis to empirical test. The basis of the test was Modigliani and Miller's Proposition II, a corollary of their fundamental hypothesis. Proposition II, in effect, states that equity investors fully discount any increase in risk due to financial leverage so that there is no possibility for the firm to reduce its cost of capital by employing financial leverage. The results of the research reported in this dissertation do not support that contention. The study indicates that, if equity investors require any increase in premium for increasing financial leverage, the premium required is significantly less than that predicted by the Modigliani-Miller Proposition II, over the range of …