Which of the Following Statements Is FALSE

question 38

Multiple Choice

Which of the following statements is FALSE?

• A)Because reducing debt reduces the risk of financial distress,insurance can relax this tradeoff and allow the firm to increase its use of debt financing.
• B)By lowering the volatility of the stock,insurance discourages concentrated ownership by an outside director or investor who will monitor the firm and its management.
• C)If a firm is subject to graduated income tax rates,insurance can produce a tax savings if the firm is in a higher tax bracket when it pays the premium than the tax bracket it is in when it receives the insurance payment in the event of a loss.
• D)In a perfect market without other frictions,insurance companies should compete until they are just earning a fair return and the NPV from selling insurance is zero.The NPV is zero if the price of insurance equals the present value of the expected payment;in that case,we say the price is actuarially fair.

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Definitions:

Marketplace

An economic space, physical or virtual, where goods, services, and assets are exchanged between buyers and sellers.

Technicalities

Minor aspects or details in a set of rules or laws that can be used to circumvent or evade the intended spirit or purpose of the broader regulation.

Merchants

Individuals or companies engaged in the buying and selling of goods, especially on a large scale or with foreign countries.

UCC

Uniform Commercial Code, a set of laws that govern commercial transactions in the United States.