The Introduction of Tax Benefit Pushes the Bias Towards Very

question 7

Multiple Choice

The introduction of tax benefit pushes the bias towards very high gearing levels to obtain lower WACC and higher value. What is the main reason why we do not observe such high gearing in real- world companies?

• A) The higher risk to the firm of financial distress
• B) The increasing risk of financial distress borne by finance providers
• C) The lower risk to the finance providers of liquidation
• D) The lower risk to the firm of financial distress

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Definitions:

Alpha

A term often used to describe the first or most significant occurrence of something.

Muscarinic Receptors

A type of receptor found in various body tissues, responding to the neurotransmitter acetylcholine, involved in parasympathetic nervous system responses.

Atropine

A medication used to treat certain types of nerve agent and pesticide poisonings, and to decrease saliva production during surgery, among other uses.

Pupil Dilation

The widening of the pupil, which can occur in response to decreased light exposure or emotional arousal, to allow more light into the eye.