When Debt Is Risky Under MM II

question 27

Multiple Choice

When debt is risky under MM II:

• A) bondholders shift more of the risk to equityholders.
• B) equityholders shift more of the risk to bondholders.
• C) the value of the interest tax shield is at its highest.
• D) there is more overall risk in the firm.

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Definitions:

Generates Revenues

The process by which a company engages in activities to bring in income from its business operations.

Gross Profit

The difference between revenue and the cost of goods sold before deducting overheads, payroll, taxes, and interest payments.

Sales Returns

Sales Returns are transactions where customers return previously purchased merchandise, leading to a reduction in sales revenue for the seller.

Office Supplies

Items used in offices such as paper, pens, and other consumables necessary for day-to-day operations.