Volatility or Blank______ increases for equity holders when leverage increases.Multiple choice question.certaintyyield-to-maturityinevitabilityrisk
Question
Volatility or Blank______ increases for equity holders when leverage increases.Multiple choice question.certaintyyield-to-maturityinevitabilityrisk
Solution
The correct answer is "risk". When leverage increases, it means a company is using more debt to finance its operations. This increases the risk for equity holders because in the event of a financial downturn, the company must still meet its debt obligations, potentially at the expense of returns to equity holders. Therefore, volatility or risk increases for equity holders when leverage increases.
Similar Questions
An unlevered firm Blank______.Multiple choice question.has more volatility than a levered firmhas more risk than a levered firmhas an all-equity capital structureis always superior to a levered firm
MM Proposition II shows that Blank______.Multiple choice question.the market value of the firm is unaffected by its capital structurethere is no risk involved with leverage when there are no corporate taxesthe cost of equity rises with leverageequity is less expensive than debt
Levered equity has Blank______ risk than unlevered equity.Multiple choice question.lessthe samegreater
When an investor borrows money and uses it to purchase stocks is called Blank______.Multiple choice question.homemade leveragehomemade de-leveragehomemade equityraising debt
Whenever the cost of capital for an all-equity firm is greater than the cost of debt, the cost of equity Blank______.Multiple choice question.decreases with leverageincreases with leverageis unaffected by leverage
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.