Give the correct response to the following question.

A firm's unlevered beta must be greater than its levered beta. True or false?

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The optimal capital structure is the one that -Select-minimizesmaximizesltem 1 the price of the firm's stock, and this generally calls for a Debt/Capital ratio that is -Select-equal tolower thanhigher thanltem 2 the one that maximizes expected EPS. Stock prices are positively related to expected earnings but negatively related to higher risk. To the extent that higher debt levels raise expected EPS, financial leverage works to increase the stock price. However, higher debt levels also -Select- increasedecreaseltem 3 the firm's risk, which -Select-lowersraisesltem 4 the cost of equity and works to reduce the stock price. Sophisticated financial managers use their forecasted ratios to predict how bankers and other lenders will judge their firms' risks and thus their costs of debt. However, more debt also raises the risk borne by stockholders, which -Select-lowersraisesltem 5 the cost of equity. It is harder to quantify leverage's effect on the cost of equity, but the -Select-GordonCAPMHamadaltem 6 equation, which can help measure the effect, is shown below: by bu[1+(1-T)(D/E)] The optimal capital structure is the one that -Select-minimizesmaximizesltem 1 the price of the firm's stock, and this generally calls for a Debt/Capital ratio that is -Select-equal tolower thanhigher thanltem 2 the one that maximizes expected EPS. Stock prices are positively related to expected earnings but negatively related to higher risk. To the extent that higher debt levels raise expected EPS, financial leverage works to increase the stock price. However, higher debt levels also -Select- increasedecreaseltem 3 the firm's risk, which -Select-lowersraisesltem 4 the cost of equity and works to reduce the stock price. Sophisticated financial managers use their forecasted ratios to predict how bankers and other lenders will judge their firms' risks and thus their costs of debt. However, more debt also raises the risk borne by stockholders, which -Select-lowersraisesltem 5 the cost of equity. It is harder to quantify leverage's effect on the cost of equity, but the -Select-GordonCAPMHamadaltem 6 equation, which can help measure the effect, is shown below: by bu[1+(1-T)(D/E)]

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False A firms unlevered beta must be lower than its levered beta A firms unlever... View the full answer