Consider the following equation for the question(s)below:
E + D = U = A
-Which of the following statements is FALSE?
A)The levered equity return equals the unlevered return, plus an extra 'kick' due to leverage.
B)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.
C)By holding a portfolio of the firm's equity and its debt, we can replicate the cash flows from holding its levered equity.
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

D) is false because if a firm is unlevered, it means there is no debt, so all of the free cash flows generated by its assets are indeed available to be paid out to its equity holders. This statement is true, making C the false statement as it incorrectly describes the relationship between holding a firm's equity and debt versus holding its levered equity.

Consider the Following Equation for the Question(s)below