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.

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Definitions:

Defensive Behaviours

Measures or responses undertaken to safeguard oneself from real or imagined dangers or critiques.

Organizational Members

Individuals who are part of an organization, contributing to its culture, goals, and objectives through their roles and responsibilities.

Reduce Activity

Involves decreasing the level, intensity, or amount of work or operations, often aimed at improving efficiency or reducing costs.

Avoid Blame

A strategy or behavior engaged in by individuals or organizations to prevent or divert blame from themselves.