Which of the Following Is a Safe Assumption for a Firm

question 34

Multiple Choice

Which of the following is a safe assumption for a firm in which the PV of the tax shield is approximately equal to the costs of financial distress?

• A) The tax shield has been calculated incorrectly.
• B) The firm is too heavily levered financially.
• C) The firm has reached its optimal debt level.
• D) The firm appears to have low risk of financial distress.

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Definitions:

Limited Partnership

A business structure where one or more partners have limited liabilities, and at least one partner has unlimited liability.

Long-term Businesses

Companies or enterprises engaged in operations with the aim or expectation of continuing for many years into the future.

LLLP

A limited liability limited partnership, a type of partnership where some partners have limited liability (similar to limited partners in an LP) while also having the ability to participate in management.

General Partner

A general partner is an owner of a partnership who has unlimited liability and is typically involved in the day-to-day management of the business.