Which of the Following Statements Is FALSE

question 54

Multiple Choice

Which of the following statements is FALSE?

• A)Firms with steady,reliable cash flows,such as utility companies,are able to use high levels of debt and still have a very low probability of default.
• B)If there were no costs of financial distress,the value of the firm would continue to increase with increasing debt until the interest on the debt exceeds the firm's earnings before interest and taxes and the tax shield is exhausted.
• C)The costs of financial distress reduce the value of the levered firm,V^L.The amount of the reduction decreases with the probability of default,which in turn increases with the level of the debt D.
• D)The tradeoff theory states that firms should increase their leverage until it reaches the level D* for which V^L is maximized.

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Definitions:

Refusal To Pay

The act of deliberately not making a payment that is due, typically in the context of bills, debts, or other financial obligations.

Endorsement

The act of signing one's name on the back of a check or other negotiable document, transferring its legal title or rights to another individual or entity.

Transfer Warranties

Guarantees provided by a seller regarding the legality of transferring ownership of goods.

Transferee

is an individual or entity that receives the transfer of property, rights, or interest from another.