If One Takes a Sample of Pairs of Points Over

question 32

Multiple Choice

If one takes a sample of pairs of points over a narrow range of X or Y scores, what effect might this have on the value of r ?

• A) inflate r
• B) have no effect on r
• C) reduce r
• D) cannot be determined

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Definitions:

Unlevered Firms

Companies that operate without the use of borrowed money or financial leverage.

M&M Proposition II

A theory proposing that the cost of equity for a leveraged firm increases linearly with its level of debt, holding the cost of debt constant.

Cost of Equity

The return a company requires to decide if an investment meets capital return requirements and is used in calculating the weighted average cost of capital.

Debt/Equity Ratio

A financial ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets, often used to gauge financial health and risk.