According to MM II, as a firm's debt-to-equity ratio increases: its financial risk increases. its operating risk increases. the expected return on equity increases. the expected return on equity decreases.

According to Modigliani-Miller theorem II, as a firm's debt-to-equity ratio increases, both its financial risk and the expected return on equity increase.

Here's why:

1. Financial Risk Increase: As a firm increases its debt relative to equity, it becomes more leveraged. This means that the firm is using more debt to finance its operations, which increases the risk of default. This is known as financial risk.

2. Expected Return on Equity Increase: As the firm becomes more leveraged, equity holders require a higher return to compensate for the increased risk. This is because if the firm defaults on its debt, equity holders are last in line to be paid. Therefore, the expected return on equity increases as the debt-to-equity ratio increases.

The operating risk of the firm, however, is not directly affected by the debt-to-equity ratio. Operating risk is related to the firm's core business operations and not its financing decisions.