When Bankruptcy Is Added to the M&M World of Capital

question 70

Multiple Choice

When bankruptcy is added to the M&M world of capital structure,which of the following statements is TRUE as more debt is added to the financing mix of the company?

• A)The interest tax shield is a benefit to equity holders,although they bear increasing risk.
• B)The advantage of the tax shield starts to be offset by financial distress costs.
• C)The WACC of the company starts to increase past a certain level of debt.
• D)All of the above

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Definitions:

Quantity Variances

Differences between actual and expected (or standard) quantities of inputs or outputs in the production process, affecting costs.

Standard Cost Sheet

A document that outlines the expected costs associated with the production of a product, including materials, labor, and overhead.

Labor Price Variance

The difference between the actual cost of direct labor and the standard cost of labor that was expected during a period.

Labor Quantity Variances

The difference between the actual hours worked and the standard hours expected for the actual production level, valued at the standard labor rate.