Consider the following equation for the question(s) below.

-Which of the following statements is FALSE assuming a perfect market?
A) The unlevered beta measures the market risk of a firm's business activities, ignoring any additional risk due to leverage.
B) If a firm holds $1 in cash and has $1 of risk-free debt, then the interest earned on the cash will equal the interest paid on the debt. The cash flows from each source cancel each other, just as if the firm held no cash and no debt.
C) The unlevered beta measures the market risk of a firm without leverage, which is equivalent to the beta of the firm's assets.
D) As the amount of debt decreases, the debt becomes riskier because there is a chance the firm will default.

Question

Consider the following equation for the question(s) below.
 
-Which of the following statements is FALSE assuming a perfect market?
A) The unlevered beta measures the market risk of a firm's business activities, ignoring any additional risk due to leverage. 
B) If a firm holds $1 in cash and has $1 of risk-free debt, then the interest earned on the cash will equal the interest paid on the debt. The cash flows from each source cancel each other, just as if the firm held no cash and no debt. 
C) The unlevered beta measures the market risk of a firm without leverage, which is equivalent to the beta of the firm's assets. 
D) As the amount of debt decreases, the debt becomes riskier because there is a chance the firm will default.

Quizplus · Accepted Answer

D) As the amount of debt increases, the debt becomes riskier because there is a chance the firm will default.

Consider the Following Equation for the Question(s) Below