What Will Be the Effect of Using Book Value of Debt

question 92

Multiple Choice

What will be the effect of using book value of debt in WACC decisions if interest rates have decreased substantially since a firm's long-term bonds were issued?

• A)the debt-to-value ratio will be overstated.
• B)the debt-to-value ratio will be understated.
• C)there will be no effect on WACC decisions.
• D)cannot be determined without knowing interest rates.

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Definitions:

Bureaucracy

A system of administration characterized by strict policies, procedures, and hierarchy intended to ensure efficiency and effectiveness in large organizations.

Social Learning Theory

A theory that proposes people can learn new behaviors through observation and imitation of others, alongside direct reinforcement of actions.

Reinforcement

is a concept in psychology that refers to a method of strengthening a desired behavior by rewarding it or reducing negative outcomes for the individual.

Imitation

The action of using someone or something as a model and attempting to copy their behavior, actions, or features.