In a Setting Where There Is No Risk That a Firm

question 70

Multiple Choice

In a setting where there is no risk that a firm will default, leverage ________ the risk of equity.

• A) increases
• B) decreases
• C) does not change
• D) cannot say for sure

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Definitions:

Bought Deal

A financing arrangement where an investment bank buys an entire new issue of securities from a company and resells it to investors.

Underwriter

A person or organization that evaluates and assumes the risk of another entity, often involved in issuing new securities as part of public offerings.

Securities

Financial instruments that represent an ownership position in a publicly-traded corporation (stock), a creditor relationship with a governmental body or a corporation (bond), or rights to ownership such as options.

Floatation Costs

The expenses incurred by a company when issuing new securities, including underwriting fees, legal fees, and registration fees.