As a Firm Increases Its Level of Debt Relative to Its

question 30

Multiple Choice

As a firm increases its level of debt relative to its level of equity, the firm i?

• A) decreasing its leverage.
• B) increasing the fraction of the firm financed with equity.
• C) increasing its leverage.
• D) decreasing the fraction of the firm financed with debt.

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Definitions:

Informed Markets

Markets where all participants have access to all relevant information, leading to more efficient price determination.

Residual Claim

Stockholders’ claim to income and assets is the residual after all other claims are satisfied.

Common Shareholders

Individuals or entities that own common shares in a corporation, granting them voting rights and a claim on a portion of the company’s profits through dividends.

Preemptive Rights

The right of existing shareholders to maintain their fractional ownership of a company by buying a proportional number of shares of any future issue of common stock.