Which of the Following Statements Is FALSE

question 66

Multiple Choice

Which of the following statements is FALSE?

• A) The value of the firm is determined by the present value (PV) of the cash flows from its current and future investments.
• B) When investors use leverage in their own portfolios to adjust the leverage choice made by the firm, we say that they are using homemade leverage.
• C) As long as investors can borrow or lend at the same interest rate as the firm, homemade leverage is a perfect substitute for the use of leverage by the firm.
• D) The investor can re-create the payoffs of unlevered equity by borrowing and using the proceeds to purchase the equity of the firm.

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Definitions:

Present Value

Present value is the current worth of a future sum of money or stream of cash flows given a specified rate of return.

Implicit Rate

The interest rate inherently included in the lease payments, reflecting the lessor's cost of financing.

Incremental Borrowing Rate

The interest rate a company would have to pay if it borrows funds, used as a benchmark in lease accounting to determine the present value of lease payments.

Net Income

The total earnings or profit of a company after all expenses and taxes have been deducted from revenue.