What Will Be the Effect of Using Book Value of Debt

question 88

Multiple Choice

What will be the effect of using book value of debt in WACC decisions if interest rates have decreased substantially since a firm's long-term bonds were issued?

• A)The debt-to-value ratio will be overstated
• B)The debt-to-value ratio will be understated
• C)There will be no effect on WACC decisions
• D)Cannot be determined without knowing interest rates Example
• Market Value of Equity = $5 million
• Book Value of Debt = $2 million
• Value of Firm = $7 million

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Definitions:

Abstract Level

A term referring to a high degree of summarization or generalization, dealing with ideas rather than concrete realities.

Concrete Level

The specific, tangible phase or stage in the development or structure of something, often used in contrast with more abstract levels.

Sensate Level

A term related to sensing or perception, potentially in psychology or sociology, regarding how individuals or cultures prioritize sensory experience.

Abstract Propositions

Abstract propositions are theoretical statements or ideas that are not tied to concrete or specific instances, often used in logic and philosophy to explore concepts and arguments.