If a Firm Increases Its Use of Both Operating and Financial

question 55

Multiple Choice

If a firm increases its use of both operating and financial leverage,then you should expect the firm's:

• A)asset beta to exceed its equity beta.
• B)beta of debt to exceed 1.0.
• C)beta to remain constant as the increased operating leverage will offset the increased financial leverage.
• D)equity beta to increase.
• E)debt beta to exceed its equity beta.

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Definitions:

Opportunity Costs

The cost of forgoing the next best alternative when making a decision, representing the benefits one misses out on.

Trading Costs

Expenses associated with buying and selling securities, including broker commissions and the bid-ask spread.

Total Costs

The sum of all expenses incurred in the production of goods or services, including both fixed and variable costs.

Net Present Value

A method used in capital budgeting to evaluate and compare the profitability of investments, which calculates the difference between the present value of cash inflows and outflows.