Which of the Following Is True

question 11

Multiple Choice

Which of the following is true?

• A) A firm with low anticipated profit will likely take on a high level of debt.
• B) A successful firm will probably take on zero debt.
• C) Rational firms raise debt levels when profits are expected to decline.
• D) Rational investors are likely to infer a higher firm value from a zero debt level.
• E) Investors will generally view an increase in debt as a positive sign for the firm's valuE.

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Definitions:

Mixed Cost

Expenses that have both fixed and variable components, changing with the level of activity but not directly proportional.

Variable Costs

are expenses that change in proportion to the activity of a business, such as the cost of raw materials used in production.

Differential Costs

The difference in total cost that will result from selecting one alternative over another.

Fixed Costs

Fixed costs include payments like rent, salaries, and insurance that are unaffected by variations in production or sales volumes.