Leverage Has Unclear Impact on Corporate Value as Debt Can

question 2

True/False

Leverage has unclear impact on corporate value as debt can reduce one aspect of agency costs (wasteful spending),but it may increase another (underinvestment).

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Definitions:

Depreciation Expense

The deliberate partitioning of the expenditure for a solid asset over its period of utility.

Capital Intensity Ratio

A firm’s total assets divided by its sales, or the amount of assets needed to generate $1 in sales.

Retention Ratio

The retention ratio, in financial terms, refers to the percentage of a company's net income that is retained and not distributed as dividends to shareholders, indicating how much of its profit a company reinvests.

Dividend Payout Ratio

A financial ratio that measures the percentage of a company's net income that is distributed to shareholders in the form of dividends.