Which of the Following Statements Is FALSE

question 57

Multiple Choice

Which of the following statements is FALSE?

• A)The tradeoff theory weighs the costs of debt that result from shielding cash flows from taxes against the benefits from the effects of financial distress associated with leverage.
• B)Leverage has costs as well as benefits.
• C)According to the tradeoff theory,the total value of a levered firm equals the value of the firm without leverage plus the present value of the tax savings from debt,less the present value of financial distress costs.
• D)Firms have an incentive to increase leverage to exploit the tax benefits of debt.But with too much debt,they are more likely to risk default and incur financial distress costs.

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Definitions:

Marginal Tax Rate

The rate at which the last dollar of income is taxed, representing the increment in tax paid for an increment in income.

City Wage Tax

A local tax imposed on individuals who work in a city, calculated as a percentage of their wages or salaries.

Proportional

Describes a relationship where changes in one variable cause changes in another variable at a constant ratio or rate.

Average Tax Rate

The ratio of total taxes paid to total income, representing the overall percentage of income that is taken by taxes.