When Both the Tax Deductibility of Debt and the Present

question 31

Multiple Choice

When both the tax deductibility of debt and the present value of potential bankruptcy costs are included,the cost of capital for a firm tends to:

• A) be constant regardless of the level of debt usage.
• B) decrease as the level of debt increases.
• C) increase as the level of debt increases.
• D) decrease up to some debt-value ratio,then increase as bankruptcy costs become significant.

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Definitions:

Radiant Energy

Energy that travels by waves or particles, particularly electromagnetic radiation such as light and heat.

Photosynthesis

A process used by plants and other organisms to convert light energy, usually from the sun, into chemical energy that can be later released to fuel the organism's activities.

NPP (Net Primary Productivity)

The rate at which plants and other photosynthetic organisms produce organic compounds in an ecosystem minus the rate at which they use some of these compounds for respiration.

Tropical Rain Forest

A hot, moist biome found near Earth's equator characterized by high levels of rainfall and biodiversity.