Which of the following statements is FALSE?
A)The levered equity return equals the unlevered return,plus an extra "kick" due to leverage.
B)By holding a portfolio of the firm's equity and its debt,we can replicate the cash flows from holding its levered equity.
C)The cost of capital of levered equity is equal to the cost of capital of unlevered equity plus a premium that is proportional to the market value debt-equity ratio.
D)If a firm is unlevered,all of the free cash flows generated by its assets are available to be paid out to its equity holders.

Question

Quizplus · Accepted Answer

Holding a portfolio of the firm's equity and its debt does not replicate the cash flows from holding its levered equity, as the cash flows to equity holders are affected by the firm's leverage and the associated financial risk.

Which of the Following Statements Is FALSE