An Investor Can Undo the Effect of Leverage on His/her

question 46

Multiple Choice

An investor can undo the effect of leverage on his/her own account by
I.investing in the equity of an unlevered firm;
II.borrowing on his/her own account;
III.investing in risk-free debt like T-bills

• A)I only
• B)II only
• C)III only
• D)I and III above

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Definitions:

Capital Budgeting

A process businesses use to evaluate and select major investment projects, considering their potential for future profits.

Income Tax Expense

The cost incurred by businesses and individuals related to the taxes on their income, reflecting the amount of income tax that a company is obligated to pay to tax authorities.

Incremental Net Cash

The difference in net cash flows between two alternatives, emphasizing the additional cash brought in by a certain decision.

Tax Rate

The percentage at which an individual or corporation is taxed.