Suppose Two Firms Have the Same Amount of Assets, Pay

question 48

True/False

Suppose two firms have the same amount of assets, pay the same interest rate on their debt, have the same basic earning power (BEP), and have the same tax rate. However, one firm has a higher debt ratio. If BEP is greater than the interest rate on debt, the firm with the higher debt ratio will also have a higher rate of return on common equity.

Distinguish between systematic (market) risk and unsystematic (diversifiable) risk.

Understand the Capital Asset Pricing Model (CAPM) and its applications to investment decisions.

Analyze the impact of portfolio composition on expected return and risk.

Understand the relationship between nominal wages, real wages, and the price level.