When the Firm Increases Its Debt in Direct Proportion to the Market

question 34

True/False

When the firm increases its debt in direct proportion to the market value of its equity, the level of the debt is perfectly correlated with the firm's market value. Consequently, the risk associated with the tax shield (resulting from interest paid on outstanding debt) is the same as that associated with the firm.

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Definitions:

Generalization

A broad statement or concept obtained by inference from specific cases, often used to make predictions or to simplify complex ideas.

Conclusion

The statement in logic that follows from the premises by means of the rules of logical inference.

Class

A group of objects or concepts with shared characteristics, often used in categorization.

Analogy

A comparison between two objects or concepts for the purpose of explanation or clarification, often suggesting that if they are alike in some respects, they are probably alike in others too.