Which of the following is the best deﬁnition of homemade leverage?
A) A legal proceeding for liquidating or reorganizing a business. Also, the transfer of some or all of a ﬁrm's assets to its creditors.
B) The direct and indirect costs associated with going bankrupt or experiencing ﬁnancial distress.
C) The equity risk that comes from the ﬁnancial policy (i.e., capital structure) of the ﬁrm.
D) The use of personal borrowing to change the overall amount of ﬁnancial leverage to which the individual is exposed.
E) The diﬃculties of running a business that is experiencing ﬁnancial distress.

Question

Quizplus · Accepted Answer

Homemade leverage refers to the use of personal borrowing to change the overall amount of financial leverage to which an individual is exposed. It is a way for individuals to increase their exposure to debt without actually directly borrowing from a bank or other financial institution. This can be done through methods such as taking out a mortgage or using personal savings to invest in assets that provide a return, which can then be used to pay down debt.

Which of the Following Is the Best Deﬁnition of Homemade