An Investor Can Undo the Effect of Leverage on His/her

question 22

Multiple Choice

An investor can undo the effect of leverage on his/her own account by

• A)investing in the equity of an unlevered firm.
• B)borrowing on his/her own account.
• C)investing in risk-free debt like T-bills.
• D)investing in the equity of an unlevered firm and investing in risk-free debt like T-bills.

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Definitions:

Raw Materials

Raw materials are the basic, unprocessed inputs used in the manufacturing of goods, including items like minerals, chemicals, or agricultural products essential for production processes.

Factory Overhead Applied

The allocation of all indirect costs of manufacturing to the actual production, aiding in the determination of the total cost of production.

Predetermined Factory Overhead Rate

The rate used to apply factory overhead costs to the goods manufactured. The rate is determined by dividing the budgeted overhead cost by the estimated activity usage at the beginning of the fiscal period.

Activity Base

A measure used in costing, representing a unit of activity that triggers costs, helping to allocate costs more accurately.