The Present Value of the Costs of Financial Distress Increases

question 113

Multiple Choice

The present value of the costs of financial distress increases with increases in the debt ratio because the:

• A)Expected return on assets increases
• B)Present value of the interest tax shield is greater
• C)Equity tax shield is depleted
• D)Probability of default and/or bankruptcy is greater

---

Definitions:

Closed Shop

A workplace where only workers who are already members of the union can be hired.

Agency Shop

A workplace where employees are not required to join the union, but must pay union dues as the union negotiates on behalf of all employees.

Rand Formula

An option in a collective agreement enabling employees to retain the right not to join the union, though they are still required to pay union dues; also known as an agency shop.

Check-Off Provision

A provision in a collective agreement whereby employees agree to have the employer deduct union dues from their payroll.