Two Firms Have the Same Operating Structure and the Same

question 37

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. The tax rate faced by both firms is .4. The debt beta is assumed to zero. What is the difference in systematic risk between the riskier firm and the less risky firm?

• A) .26 Firm 2 beta greater than Firm 1 beta.
• B) .15 Firm 2 beta greater than Firm 1 beta.
• C) .30 Firm 2 beta greater than Firm 1 beta.
• D) .10 firm 2 beta greater than Firm 1 beta.

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Definitions:

Proprioceptor

Sensory receptors found in muscles and tendons that provide information about body position and movement.

Spinal Cord

A long, thin, tubular structure made up of nervous tissue, which extends from the brainstem down the back, and is enclosed in and protected by the vertebral column.

Pupillary Reflex

An involuntary reflex adjustment of the pupil size in response to varying light intensities to control the amount of light entering the eye.

Oculomotor

Relating to the third cranial nerve, which controls most of the eye's movements, including constriction of the pupil and maintaining an open eyelid.