Consider the Following Equation for the Question(s) Below

question 108

Multiple Choice

Consider the following equation for the question(s) below.

-Which of the following statements is FALSE?

• A) The levered equity return equals the unlevered return plus an extra "kick" due to leverage.
• B) By holding a portfolio of a firm's equity and its debt, we can replicate the cash flows from holding its levered equity.
• C) The cost of capital of levered equity is equal to the cost of capital of unlevered equity plus a premium that is proportional to the market value debt-equity ratio.
• D) If a firm is unlevered, all of the free cash flows generated by its assets are available to be paid out to its equity holders.

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Definitions:

Major Setback

A significant or substantial problem, failure, or delay that prevents progress or the achievement of objectives, often requiring considerable effort to overcome.

Consolidation

The process of combining multiple companies, assets, or financial statements into a single entity, often to achieve greater efficiency, market share, or financial stability.

Rule of Reason

A legal doctrine used in antitrust law, determining the legality of a business practice based on its overall reasonableness and its impact on competition.

American Tobacco

The American Tobacco Company was a major American tobacco company founded in 1890 by J.B. Duke, which played a significant role in the development of the tobacco industry in the United States.