Two Firms Have the Same Operating Structure and the Same

question 22

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. The tax rate faced by both firms is.4. The debt beta is assumed to zero. What is the difference in systematic risk between the riskier firm and the less risky firm?

• A) 0.26 Firm 2 beta greater than Firm 1 beta.
• B) 0.15 Firm 2 beta greater than Firm 1 beta.
• C) 0.30 Firm 2 beta greater than Firm 1 beta.
• D) 0.10 firm 2 beta greater than Firm 1 beta.

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Definitions:

Significance Level

The probability of rejecting the null hypothesis when it is true, usually set as a benchmark for testing hypotheses in research.

Decreasing

Involving a reduction in amount, size, strength, or number; moving in a descending order.

β Value

A parameter in statistical models, especially regression analysis, representing the slope of the line of best fit or the degree of change in the dependent variable for a one-unit change in an independent variable.

Significance Level

The probability of rejecting the null hypothesis in a statistical test when it is actually true, commonly denoted by alpha (α) and used to measure the strength of evidence against the null hypothesis.