Which of the Following Statements Is FALSE

question 52

Multiple Choice

Which of the following statements is FALSE?

• A)Because insurance reduces the risk of financial distress,it can relax this tradeoff and allow the firm to increase its use of debt financing.
• B)By lowering the volatility of the stock,insurance discourages concentrated ownership by an outside director or investor who will monitor the firm and its management.
• C)When a firm is subject to graduated income tax rates,insurance can produce a tax savings if the firm is in a higher tax bracket when it pays the premium than the tax bracket it is in when it receives the insurance payment in the event of a loss.
• D)In a perfect market without other frictions,insurance companies should compete until they are just earning a fair return and the NPV from selling insurance is zero.The NPV is zero if the price of insurance equals the present value of the expected payment;in that case,we say the price is actuarially fair.

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Definitions:

Acromegaly

A hormonal disorder that results from the excessive production of growth hormone, leading to enlargement of body parts.

Growth Hormone

A peptide hormone that stimulates growth, cell reproduction, and cell regeneration in humans and other animals.

Triiodothyronine

A thyroid hormone, also known as T3, that plays an important role in the body's control of metabolism.

Anterior Pituitary

A part of the pituitary gland responsible for releasing hormones that regulate various bodily functions, including growth, metabolism, and reproduction.