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The asset beta reflects the risk of the firm's underlying assets, independent of its capital structure. When the debt-to-equity ratio rises, the firm's financial leverage increases, which may affect the equity beta but not the asset beta itself. The asset beta remains constant because it is based on the business's operational risk and market conditions, rather than the financing mix. Therefore, while the equity beta adjusts to reflect the higher financial risk, the asset beta remains unchanged.
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Why the increased use of debt increases the financial risk of the equity shareholder and hence the cost of equity increases?
Increased use of debt amplifies financial risk for equity shareholders because debt obligations must be met regardless of a company's performance, leading to higher volatility in earnings and cash flow. This heightened risk makes equity less attractive to investors, who demand a higher return to compensate for the increased uncertainty associated with leveraged firms. Consequently, the cost of equity rises as shareholders require greater compensation for the risk they undertake.
When does the contribution margin ratio always increase?
The contribution margin ratio increases when the selling price per unit rises without a proportional increase in variable costs, or when variable costs per unit decrease while the selling price remains constant. Essentially, any scenario that increases the difference between sales revenue and variable costs will enhance the contribution margin ratio. Additionally, a shift in sales mix towards higher-margin products can also lead to an increase in the overall contribution margin ratio.
What happens to the percentage of an income that is taxed when income rises and the tax is a progressive one?
the percentage of tax rises
Any expense that rises or falls is a variable what?
Any expense that rises or falls is a variable cost. Variable costs change in direct proportion to the level of production or sales activity. Examples include materials, labor, and commissions, which increase or decrease based on the volume of goods or services produced. In contrast, fixed costs remain constant regardless of production levels.
Where do fees earned show on the balance sheet?
Fees earned are not directly shown on the balance sheet; instead, they are reflected in the income statement as revenue. However, the impact of fees earned can indirectly affect the balance sheet through retained earnings, which increase as net income rises from the revenue generated. This increase in retained earnings will subsequently appear in the equity section of the balance sheet.
When debt-to-equity ratio rises why does the asset beta not change?
Asset Beta measures the inherent riskiness of the underlying assets with respect to the market. The equity and debt only affect the inherent riskiness of the firm, but the additional debt has no influence on the underlying riskiness of the assets.For instance, if you are in the hotel business, why should the amount of debt you have affect your ability to get visitors stay at your hotel? high debt does, however, affect the underlying riskiness of the equity (it is riskier to hold shares of a firm with large amounts of debt). therefore, the equity beta does change.
Leverage is increased as the ratio of debt to common stock rises?
True
What is the line ratio for rise to run?
The line ratio for rise to run is a measure of slope, often expressed as "rise/run." It indicates the vertical change (rise) over the horizontal change (run) between two points on a line. For example, if a line rises 3 units for every 4 units it runs horizontally, the line ratio is 3/4. This ratio helps determine the steepness of the line in graphical representations.
Relationship between average propensity to consume and marginal propensity to consume?
APCMPCIt refers to the ratio of absolute consumption absolute income at a particular point of time.It refers to the ratio of change in consumption to change in income; MPC is the rate of change in APC.APC is useful in long periodMPC is useful in short-periodIn the long period APC=MPC.In the short period there is no change in MPC and MPC
When bread dough rises when yeast is added is it a chemical change?
A chemical change
Hot air rises because of a change in its?
temperature
An important property of every line is its steepness or?
slope, which indicates how steeply the line rises or falls as it moves along its path. The slope is found by taking the ratio of the vertical change to the horizontal change between two points on the line. It is a measure of the rate at which the line is ascending or descending.
Why should someone buy a call option?
Someone should buy a call option if they believe the price of the underlying asset will increase in the future. By purchasing a call option, they have the right to buy the asset at a predetermined price, known as the strike price, which can potentially lead to profits if the asset's price rises above the strike price.
When the temperature rises how does the number and size of the bubbles change?
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What is fixed rate home equity line of credit?
Home equity credit allows funds to be drawn against the value of the home. Fixed rate loans ensure that the repayable value will not increase for a fixed term, so protecting against interest rate rises.
When there is surplus prices tend to rises true or false?
do the equilibruim have to change for the supply or demand change
When bread dough rises when yeast is added is it a chemical change why?
chemical
