All Else Equal, If a Firm Increases Its Leverage (Either

question 23

Multiple Choice

All else equal, if a firm increases its leverage (either operating, financial, or both) , its weighted average cost of capital probably will

• A)increase because risk increases.
• B)decrease because risk decreases.
• C)increase because risk decreases.
• D)remain about the same because risk does not change.
• E)change somehow, but more information is needed to determine the direction.

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Definitions:

Investment Performance

An assessment of how an investment has done over a specific period, often compared to a benchmark or standard.

Financial Intermediaries

Institutions that act as middlemen between savers and borrowers, facilitating the flow of funds in the financial system.

Diversify Their Portfolios

The strategy of spreading investments among various financial instruments, industries, and other categories to minimize risk.

Credit Risk

The potential that a borrower will fail to meet their obligations in accordance with agreed terms.