When Debt Is Risky Under MM II

question 34

Multiple Choice

When debt is risky under MM II:

• A)Bond holders shift more of the risk to equity holders
• B)Equity holders shift more of the risk to bond holders
• C)The value of the interest tax shield is at its highest
• D)There is more overall risk in the firm

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Definitions:

Fixed Cost

Expenses that do not change with the level of production or sales in the short term, such as rent, salary, and insurance.

High-Low Method

A technique in cost accounting used to estimate fixed and variable cost components of a product or service based on the highest and lowest levels of activity.

Variable Cost Elements

Expenses that change in proportion to the amount of goods produced or the volume of sales.

Fixed Cost Elements

Costs that do not change with the level of production or sales activity within a certain range or over a certain period.