It Is Not Correct to Discount the Cash Flows of a Levered

question 75

Multiple Choice

It is not correct to discount the cash flows of a levered firm with the cost of equity of the unlevered firm because ________.

• A) leverage decreases the risk of equity of the firm
• B) leverage changes the unlevered cost of equity
• C) leverage increases the risk of the equity of the firm
• D) cost of debt decreases in this setting

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Definitions:

Limited Liability Company

An organizational model that merges the direct tax benefits of a partnership or sole proprietorship with the corporation's advantage of limited liability.

General Partnership

A business structure where two or more partners share unlimited liability for the company's debts and obligations.

Capital Account

An account on a nation's balance of payments that records investments and loans between the country and the rest of the world.

Revaluation

The process of adjusting the book value of a currency, asset, or liability to reflect its current market value.