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:

Allowance for Doubtful Accounts

A contra-asset account that represents receivables that are expected to become uncollectable, used to estimate bad debts.

Bad Debts Expense

An expense account reflecting the cost of receivables that a company is unable to collect, considered a cost of doing business.

Accounts Receivable

Represents money owed to a business by its customers for goods or services delivered or used but not yet paid for.

Bad Debts Recovered

The unexpected receipt of payment on accounts previously written off as bad debts, leading to an income entry in the financial statements.