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

question 65

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:

Oviducts

The tubes through which eggs pass from the ovaries to the uterus in female mammals; also known as fallopian tubes.

Vagina

The elastic, muscular tube, extending from the cervix to its external opening, that receives the penis during heterosexual intercourse and serves as the birth canal.

Uterus

A major female reproductive organ in many animals, including humans, where offspring are conceived and in which they gestate before birth.

Cervix

The lower part of the uterus in the female reproductive system, connecting the uterus to the vagina.