Which of the Following Statements Is FALSE

question 40

Multiple Choice

Which of the following statements is FALSE?

• A) As long as investors can borrow or lend at the same interest rate as a firm, homemade leverage is a perfect substitute for the use of leverage by the firm.
• B) When investors use leverage in their own portfolios to adjust the leverage choice made by a firm, we say that they are using homemade leverage.
• C) The value of a firm is determined by the present value (PV) of the cash flows from its current and future investments.
• D) The investor can re-create the payoffs of unlevered equity by borrowing and using the proceeds to purchase the equity of a firm.

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Definitions:

Bounded Rationality

A theory proposing that people base their choices on the restricted data they have access to and within the limitations of their cognitive abilities.

Availability Phenomena

A cognitive bias where individuals give undue weight to information that is readily available to them when making decisions.

Limited Search

The process of looking for information or solutions with restrictions, often due to time, resources, or access limitations.

Bounded Rationality Model

A model that suggests that individuals make decisions based on a limited amount of information and through a simplification of complex problems, constrained by their cognitive limitations.