The Increase in Risk to Equity Holders When Financial Leverage

question 38

Multiple Choice

The increase in risk to equity holders when financial leverage is introduced is evidenced by:

• A) higher EPS as EBIT increases.
• B) a higher variability of EPS with debt than all equity.
• C) increased use of homemade leverage.
• D) equivalence value between levered and unlevered firms in the presence of taxes.

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Definitions:

Factorial Designs

Experimental strategy that involves testing more than one independent variable at the same time, to study their effects and interactions.

Independent Variable (IV)

A variable in an experiment that is manipulated by the researcher to observe its effect on the dependent variable.

Levels

Refers to the different values or states that an independent variable can take on in an experiment or study.

Main Effects

are the direct impacts of each independent variable on the dependent variable in an experimental study, disregarding interactions between variables.