All of the Following Statements Are Correct Except

question 94

Multiple Choice

All of the following statements are correct except:

• A) The tax deductibility of debt becomes more important to firms with large non-debt tax shields such as foreign tax credits granted by the U.S. government to firms that pay taxes to foreign governments.
• B) As the debt/total asset ratio rises, or as earnings become more volatile, the firm will face higher borrowing costs, driven upward by bond investors requiring higher yields to compensate for additional risk.
• C) The static tradeoff hypothesis states that firms will balance the advantages of debt (its lower cost and tax-deductibility of interest) with its disadvantages (greater possibility of bankruptcy and the value of explicit and implicit bankruptcy costs).
• D) Agency costs reduce the optimal level of debt financing for a firm below the level that would be appropriate if agency costs were zero.

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Definitions:

Accident

The fallacy of applying a generalization to a special case in disregard of qualities or circumstances that make it an exception to the generalization.

General

Relating to or involving all or most people, things, or places, especially without specifying details.

Opposite

Pertaining to something that is diametrically different in position, direction, or character from something else.

Division

The fallacy of inferring that a part has a property merely because the whole has that property.