All of the Following Statements Are Correct Except

question 10

Multiple Choice

All of the following statements are correct except:

• A)The tax deductibility of debt becomes less important to firms with large nondebt 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.
• E)All of the above statements are correct.

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Definitions:

Legal Entities

Organizations that have legal rights and responsibilities, including the ability to enter into contracts, sue, and be sued; examples include corporations, governments, and non-profit organizations.

New Entity

A freshly established organization or structure that has its own legal identity.

Acquisition

The process of obtaining control of another corporation, either through purchase or merger.

Takeover

The transfer of control over a company from one group to another. The term generally has a hostile implication.