One advantage of using leverage is that it allows the original owners of the firm to maintain their equity stake. One disadvantage of using leverage is that it always reduces the expected return to equity owners of the firm. In a highly-leveraged firm, an over-investment problem could occur when shareholders choose to invest in a negative-NPV project which reduces the debtholders value. In a highly-leveraged firm, an under-investment problem could occur when shareholders choose to invest in a negative-NPV project which reduces the debtholders value.
One advantage of using leverage is that it allows the original owners of the firm to maintain their equity stake. One disadvantage of using leverage is that it always reduces the expected return to equity owners of the firm. In a highly-leveraged firm, an over-investment problem could occur when shareholders choose to invest in a negative-NPV project which reduces the debtholders value. In a highly-leveraged firm, an under-investment problem could occur when shareholders choose to invest in a negative-NPV project which reduces the debtholders value.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Choose all statement(s) that is (are) FALSE.
Select one or more alternatives:
One advantage of using leverage is that it allows the original owners of the firm to maintain their equity
stake.
One disadvantage of using leverage is that it always reduces the expected return to equity owners of the
firm.
In a highly-leveraged firm, an over-investment problem could occur when shareholders choose to invest in a
negative-NPV project which reduces the debtholders value.
In a highly-leveraged firm, an under-investment problem could occur when shareholders choose to invest in
a negative-NPV project which reduces the debtholders value.
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