Question

In: Finance

Other things held constant, an increase in financial leveragewill decrease a for-profit business’s market risk...

Other things held constant, an increase in financial leverage will decrease a for-profit business’s market risk as measured by its beta coefficient.


True

False

Solutions

Expert Solution

Answer - false

Reason - financial leverage is determined by the percentage of debt or fixed interest capital present in a businesses capital structure. The more debt available in a business the more it will be paying interest which will make the business more exposed to market. It means the increase in interest increases the firms market risk of business. The beta coefficient measures the firms risk with respect to market, where market risk is 1. If the firms risk is less than 1 it means the firm is less volatile to market shocks and vice versa. And increase of financial leverage will increase the beta coefficient which means the firms market risk is also increased.

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

​Other things held constant, which of the following actions would increase the amount of cash on...
​Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet? Question 11 options: ​The company declares a stock split. ​The company cuts its dividend. ​The company repurchases common stock. ​The company purchases a new piece of equipment. ​The company gives customers more time to pay their bills.
Other things held constant, which of the following actions would increase the amount of cash on...
Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet? a. The company repurchases common stock. b. The company purchases a new piece of equipment. c. The company issues new common stock. d. The company gives customers more time to pay their bills. e. The company pays a dividend.
Other things held constant, which of the following alternatives would increase a company's cash flow for...
Other things held constant, which of the following alternatives would increase a company's cash flow for the current year? a. Increase the days' sales outstanding (DSO) without reducing sales b. Purchase new equipment c. Decrease the accounts payable balance d. Increase the inventory turnover ratio without affecting sales e. Decrease the accrued wages balance ____    2.   You observe that a firm's ROE is above the industry average, but its profit margin and debt ratio are both below the industry average....
Other things held constant, if a firm holds cash balances in excess of their optimal level...
Other things held constant, if a firm holds cash balances in excess of their optimal level in a non-interest bearing account, this will tend to lower the forms? What is the future value of a 5 year annuity with annual payments of $200, evaluated at a 15% interest rate?
Other things held constant, which of the following will affect the current ratio, assuming an initial...
Other things held constant, which of the following will affect the current ratio, assuming an initial current ratio greater than 1.0? Fixed assets are sold for cash. Long-term debt is issued to pay off current liabilities. Accounts receivable increases. Cash is used to pay off accounts payable. A bank loan is obtained, and the proceeds are credited to the firm's checking account. all of the above none of the above
Other things held constant, What is the relationship between the time to maturity and interest rate...
Other things held constant, What is the relationship between the time to maturity and interest rate sensitivity of bonds? explain bonds with higher and lower maturity pros and cons
Which of the following statements is CORRECT? Other things held constant, the less debt a firm...
Which of the following statements is CORRECT? Other things held constant, the less debt a firm uses, the lower its return on total assets will be. The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company's operating efficiency is that the BEP does not reflect the effects of debt and taxes. The return on common equity (ROE) is generally regarded as being less significant, from a stockholder's viewpoint, than the return...
A decrease in a firm's financial leverage will: A. Increase the operating risk of the firm....
A decrease in a firm's financial leverage will: A. Increase the operating risk of the firm. B. Decrease the value of the firm in a non-MM world. C. Decrease the WACC. D. Reduce the variability in earnings per share.
For a normal distribution, all other things being equal and constant, if you increase the mean...
For a normal distribution, all other things being equal and constant, if you increase the mean from 1 to 10, the result will be: a. A distribution with 10 times the amount of area. b. A distribution that is 10 times more spread out and that has 10 times more area. c. A distribution that is 10 times more spread out with the same amount of area. d. A distribution that shifts to the right by 10 units.
For a normal distribution, all other things being equal and constant, if you increase the standard...
For a normal distribution, all other things being equal and constant, if you increase the standard deviation from 1 to 10, the result will be: a. A distribution with 10 times the amount of area b. A distribution that is 10 times more spread out and that has 10 times more area. c. A distribution that is 10 times more spread out with the same amount of area. d. A distribution that shifts to the right by 10 units.
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT