Which of the Following Statements Is Correct

question 20

Multiple Choice

Which of the following statements is correct?

• A)When financial leverage is used, the graphical probability distribution of net income would tend to be more peaked than a distribution where no leverage is present, other things held constant.
• B)From an operational standpoint the goal of maintaining financial flexibility translates into maintaining adequate reserve borrowing capacity.
• C)While business risk varies form one industry to another and can change over time, it affects all firms equally within a particular industry.
• D)The optimal capital structure is the one that maximizes EBIT, and this always calls for a debt ratio which is lower than the one that maximizes expected EPS.
• E)The above statements are all false.

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Definitions:

Allowance for Doubtful Accounts

An accounting method that reduces accounts receivable on a company's balance sheet by estimating the amount of receivables that will not be collected.

Uncollectible Receivables

Debts owed to a company that are considered unlikelihood to be collected.

Bad Debt Expense

Unrecoverable amounts from accounts receivable representing financial losses for a company.

Direct Write-off Method

An accounting practice where actual bad debts are written off against income at the time they are identified as irrecoverable.