Financial leverage would NOT be increased if a firm financed its next project with:
A) common stock.
B) preferred stock.
C) bonds with embedded call options.
That is all information provided with the question.
Unless the firm is currently UN-leveraged, I don't think any of the above answer make sense?
Or does anyone have a better explanation than:
The correct answer was A) common stock.
Financial leverage is the result of financing assets with fixed income securities such as bonds or preferred stock. Each of these alternatives has a required payment component that increases the risk of the firm beyond that arising solely from business risk.作者: DSquaredSlim 时间: 2011-7-11 19:26
I dont see what the issue is, the answer is clearly correct
if the firm takes on preferred stock or debt it is commiting to make a payment, it is becoming levered, things go good, great ROE is multiplied, things go bad...the @#$%& will multiply...
on the other hand if it takes on more stock, it would become less levered....
say it had 1$ debt, 1$ stock, well if it took on 1 more in stock, the effect of debt becomes less...作者: chandsingh 时间: 2011-7-11 19:26
Sorry, didn't know what come in to me.
I saw it asking
Financial leverage would NOT be !!changed!! if a firm financed its next project with:
