Two Firms Have the Same Operating Structure and the Same

question 11

Multiple Choice

Two firms have the same operating structure and the same operating systematic risk, ß = .8. Firm 1 has 20% debt in their capital structure while Firm 2 has four units of debt for every 7 units of equity. If the tax rate faced by both firms is 0.4 which has the riskier equity?

• A) Firm 1 because it has a higher ratio of debt to equity.
• B) Neither because they both have the same ß = .8.
• C) Firm 2 because it has a higher ratio of debt to equity.
• D) Neither firm because systematic risk is unaffected by the financing.

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Definitions:

Five-Part Reading System

A structured approach to reading that includes preparation, reading, note-taking, questioning, and summarizing to improve comprehension and retention.

SQ3R Reading System

A systematic approach to reading that involves Survey, Question, Read, Recite, and Review to improve comprehension and retention.

Anxiety

A feeling of worry, nervousness, or unease, typically about an imminent event or something with an uncertain outcome.

Retention

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