When Graphing Firm Value Against Debt Levels,the Debt Level That

question 48

Multiple Choice

When graphing firm value against debt levels,the debt level that maximizes the value of the firm is the level where:

• A) the increase in the present value of distress costs from an additional dollar of debt is greater than the increase in the present value of the debt tax shield.
• B) the increase in the present value of distress costs from an additional dollar of debt is equal to the increase in the present value of the debt tax shield.
• C) the increase in the present value of distress costs from an additional dollar of debt is less than the increase of the present value of the debt tax shield.
• D) distress costs as well as debt tax shields are zero.
• E) distress costs as well as debt tax shields are maximized.

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Definitions:

Products

Substances formed as a result of a chemical reaction, found on the right side of a chemical equation.

Potential Energy

The energy possessed by a body by virtue of its position relative to others, stresses within itself, electric charge, and other factors.

Chemical Energy

A form of potential energy stored in chemical bonds between atoms and molecules.

Mechanical Energy

The sum of potential energy and kinetic energy in a system, related to the position and movement of objects.