2. Explain why increasing financial leverage increases the risk tolerated by shareholders. 3. In your opinion, why do most businesses with financially attractive investment opportunities continue to...

Extracted text: 2. Explain why increasing financial leverage increases the risk tolerated by shareholders. 3. In your opinion, why do most businesses with financially attractive investment opportunities continue to sustain conservative capital structures? 4. On the other hand, why do you suppose several promising small businesses fail to follow the recommendation in item 3? 5. One determinant of a company's debt capacity is the liquidity of its assets. Name two common ratios that are exclusively intended to measure the liquidity of a company's assets relative to its liabilities. Give their specific use to the company's performance analyzation.


Extracted text: True or False: Write T if the statement is true and accurate, otherwise indicate F if you think the statement is false. Further justify your answer on each of the questions. 8 1. The free cash flow valuation model is based on the same principle as the P/E valuation approach; that is, the value of a share of stock is the present value of future cash flows. 2. Preferred stock is a special form of stock having a fixed periodic dividend that must be paid prior to payment of any interest to outstanding bonds. 3. A common stockholder has no guarantee of receiving any cash inflows but receives what is left after all other claims on the firm's income and assets have been satisfied. 4. Investors purchase a stock when they believe that it is undervalued and sell when they feel that it is overvalued. 5. In common stock valuation, any action taken by the financial manager that increases risk will also increase the required return.