Irene Panagiotou Has Recently Completed This Class

question 29

Multiple Choice

Irene Panagiotou has recently completed this class. While attending her company's holiday party, she hears one of the executives mention that the company is heavily leveraged. Irene, who recently bought 300 shares in the company's stock, is very interested in this bit of information. What does Irene understand such leverage will do for her?

• A) It will increase the amount of taxes she will have to pay on her dividends.
• B) It is a time-proven way to both improve the expected return on equity and reduce the financial risk to shareholders. This is because reliance on debt means creditors are assuming most of the risk, while shareholders are entitled to most of the profits.
• C) It will protect her return on investment if the company experiences a downturn in sales.
• D) It means that the firm is financed with a sizeable amount of debt, which can increase the return on her investment in good times but can lead to a lower return when times are bad.

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Definitions:

Beliefs

Convictions or acceptances that something exists or is true, especially without proof.

Mere Exposure Effect

A psychological phenomenon whereby individuals develop a preference for things simply because they are familiar with them.

Proximity Hypothesis

The theory that individuals will form relationships or have positive feelings towards things or people that are physically close to them.

Frequency Paradox

A concept indicating the mismatch between the perceived frequency of occurrence of an event and its actual frequency.