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:

Adjusting Entry

A journal entry made in accounting records to update the balances of accounts at the end of an accounting period before financial statements are prepared.

Revenue and Expense Account

Accounts in the general ledger that track the income earned and expenses incurred by a business during a given period, critical for determining net income.

Advertising Expense

Costs incurred in promoting products or services, typically considered operating expenses.

Period Cost

Expenses that are incurred during a specific time period but are not directly tied to the manufacturing process, such as selling, general, and administrative expenses.