The Underlying Reason That Leverage May Increase Stock Price Is

question 112

Multiple Choice

The underlying reason that leverage may increase stock price is that under certain conditions:

• A)it increases risk, which in turn requires a larger return on equity.
• B)it improves performance measured in terms of EBIT and EPS.
• C)it improves performance measured in terms of ROE and EPS.
• D)it is cheaper to raise new debt than it is to raise new equity.

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Definitions:

Monopolistic Competition

A market structure characterized by many producers selling products that are similar but not identical, allowing for competition based on quality, price, and brand.

Nondiscriminating Monopolist

A monopolist that charges all consumers the same price for its product or service, regardless of the market segment.

Profit-Maximizing

The process or strategy of adjusting production and pricing to achieve the highest possible profit.

Socially Optimal Price

The price of a product that results in the most efficient allocation of an economy's resources and that is equal to the marginal cost of the product.