Which one of the following is not a correct statement? We can translate a equity...
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Which one of the following is not a correct statement? We can translate a equity into a asset by removing the firm's financial risk from its equity. To do this we need to know: equity market risk premium, the amount of the firm's debt financing the amount of the firm's equity financing. Financial leverage is the use of fixed payment obligations, such as notes or bonds, to finance a firm's assets. The greater the use of debt obligations, the more financial leverage and the greater the risk associated with cash flows to owners. So the effect of using debt is to increase the risk of the firm's equity. If the firm has debt obligations, the market risk of its common stock is greater than its assets' risk (that is, equity > asset), due to financial leverage. Since the asset's risk is shared between creditors and owners, we can represent the asset's market risk as the weighted average of the firm's debt beta, debt, and equity beta, equity. If a firm has excess cash and no debt obligations (negative leverage), the market risk of its common stock is lower than its assets' risk (that is, equity
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