The use of homemade leverage:
A) Optimizes the proﬁtability of a ﬁrm.
B) Minimizes the weighted average cost of capital for a ﬁrm.
C) Makes the capital structure of a ﬁrm irrelevant.
D) Is effective only when investors own shares of all-equity ﬁrms.
E) Increases the debt-equity ratio of a ﬁrm.

Question

Quizplus · Accepted Answer

Homemade leverage refers to the idea that investors can create their own leverage by borrowing on personal accounts to adjust their risk exposure, making the firm's capital structure irrelevant according to the Modigliani-Miller theorem.

The Use of Homemade Leverage