Which of the Following Statements Is FALSE

question 98

Multiple Choice

Which of the following statements is FALSE?

• A)Firms with steady,reliable cash flows,such as utility companies,are able to use high levels of debt and still have a very low probability of default.
• B)If there were no costs of financial distress,the value of the firm would continue to increase with increasing debt until the interest on the debt exceeds the firm's earnings before interest and taxes and the tax shield is exhausted.
• C)The costs of financial distress reduce the value of the levered firm,VL.The amount of the reduction decreases with the probability of default,which in turn increases with the level of the debt D.
• D)The tradeoff theory states that firms should increase their leverage until it reaches the level D* for which VL is maximized.

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Definitions:

Shrimp Market

The global or local market involved in the trading and selling of shrimp, encompassing both wild-caught and farmed shrimp.

Excise Taxes

Excise taxes are taxes paid when purchases are made on a specific good, such as gasoline. They are often included in the price of the product.

Producer Surplus

This economic term represents the excess profit that producers make over the minimum amount they would be willing to accept for selling their goods, highlighting the benefit to sellers in a market.

Consumer Surplus

The variance between the sum consumers are ready and financially able to spend on a product or service and the sum they actually spend.