When Both the Tax Deductibility of Debt and the Present

question 31

Multiple Choice

When both the tax deductibility of debt and the present value of potential bankruptcy costs are included,the cost of capital for a firm tends to:

• A) be constant regardless of the level of debt usage.
• B) decrease as the level of debt increases.
• C) increase as the level of debt increases.
• D) decrease up to some debt-value ratio,then increase as bankruptcy costs become significant.

---

Definitions:

General Motors

A multinational corporation headquartered in the United States that designs, manufactures, markets, and distributes vehicles and vehicle parts.

Pursuit of Happiness

A fundamental right mentioned in the Declaration of Independence to freely pursue joy and live life in a way that makes one happy, as long as one does not do anything illegal or violate the rights of others.

Humble Background

A term describing an individual's origins in modest circumstances, without privilege or significant resources.