It Is Not Correct to Discount the Cash Flows of a Levered

question 69

Multiple Choice

It is not correct to discount the cash flows of a levered firm with the cost of equity of the unlevered firm because

• A) leverage changes the unlevered cost of equity.
• B) leverage increases the risk of the equity of the firm.
• C) cost of debt decreases in this setting.
• D) leverage decreases the risk of equity of the firm.

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Definitions:

Dishonored

A term used when a financial instrument like a check or promissory note is not accepted or paid on presentation.

Personal Defenses

Legal defenses that can be used to avoid enforcement of a contract or negotiation due to personal circumstances, such as minority, incapacity, or duress.

Illegality

The quality or condition of being contrary to law or forbidden by law.

Breach Of Contract

The violation of any term of a contract without a legitimate legal excuse, which allows the other party to the contract to seek legal remedies.