Two Firms Have the Same Operating Structure and the Same

question 23

Multiple Choice

Two firms have the same operating structure and the same operating systematic risk, ß = .8. firm 1 has 20% debt in their capital structure while Firm 2 has four units of debt for every 7 units of equity. If the tax rate faced by both firms is .4 which has the riskier equity?

• A) Firm 1 because it has a higher ratio of debt to equity.
• B) Neither because they both have the same ß = .8.
• C) Firm 2 because it has a higher ratio of debt to equity.
• D) Neither firm because systematic risk is unaffected by the financing.

---

Definitions:

Child Care

The care and supervision of a child or multiple children at a time, whose age ranges from two weeks to eighteen years.

Impoverished Home Environments

Living conditions lacking in resources, supports, and opportunities essential for healthy development.

Suburban

A term related to residential areas that exist on the outskirts of a city or large town.

Middle-class Adolescents

Young individuals, typically between the ages of 13 and 19, who come from socio-economic backgrounds traditionally considered to be middle class.