T or F: If a firm utilizes debt financing, an X% decline in earnings before inte
ID: 2732444 • Letter: T
Question
T or F: If a firm utilizes debt financing, an X% decline in earnings before interest and taxes (EBIT) will result in a decline in earnings per share that is larger than X%
T or F: Financial risk refers to the extra risk stockholders bear as a result of using debt as compared with the risk they would bear if no debt were used
T or F: If a project’s risk is higher than that of the firms as a whole, the cost of debt for the project would be higher than that for the firm, but the cost of equity for the project would be equal to that of the firm
T or F: Short-term debt is always excluded from the WACC calculation due to its short-term nature 8. For two mutually exclusive projects, the NPV and IRR criteria may select a different project
Explanation / Answer
1. Yes True becuase fall in ebit does not lead to fall in interest cost hence decline earnings would be greater
2. Yes True because the beta levered increases leading to rise in the risk
3. False
4. Yes true , short term debt if short term in nature would be paid offf
5. True .
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