Which of the following statements is FALSE?
A)The investor can re-create the payoffs of unlevered equity by borrowing and using the proceeds to purchase the equity of the firm.
B)When investors use leverage in their own portfolios to adjust the leverage choice made by the firm, we say that they are using homemade leverage.
C)The value of the firm is determined by the present value (PV)of the cash flows from its current and future investments.
D)As long as investors can borrow or lend at the same interest rate as the firm, homemade leverage is a perfect substitute for the use of leverage by the firm.

Question

Quizplus · Accepted Answer

This statement is false because re-creating the payoffs of unlevered equity by borrowing and investing in the same equity does not eliminate the effects of leverage. The investor is still exposed to the default risk of the firm's debt.

Which of the Following Statements Is FALSE