Which of the Following Statements Is FALSE

question 17

Multiple Choice

Which of the following statements is FALSE?

• A)The optimal level of debt D* balances the costs and benefits of leverage.
• B)As the debt level increases,the firm benefits from the interest tax shield (which has present value τ*D).
• C)If the debt level is too large,firm value is reduced due to the loss of tax benefits (when interest exceeds EBIT),financial distress costs,and the agency costs of leverage.
• D)As the debt level increases,the firm faces decreased incentives for management,which increase wasteful investment and perks.

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Definitions:

Spot Exchange Rate

The current exchange rate at which currencies can be exchanged for immediate delivery, reflecting the market's immediate valuation.

U.S. Inflation

The rate at which the general level of prices for goods and services is rising, and, consequently, the purchasing power of currency is falling within the United States.

Dollar Rally

A situation where the value of the U.S. dollar strengthens significantly against a basket of other currencies.

Foreign Currencies

Currencies used in countries other than one’s own, involved in international trading and foreign exchange markets.