Which of the Following Statements Is FALSE

question 70

Multiple Choice

Which of the following statements is FALSE?

• A)The higher the firm's leverage,the more the firm exploits the tax advantage of debt,and the lower its WACC.
• B)Corporate taxes lower the effective cost of debt financing,which translates into a reduction in the weighted average cost of capital.
• C)Because the firm's free cash flow is computed without considering the firm's leverage,we account for the benefit of the interest tax shield by calculating the WACC using the before-tax cost of debt.
• D)The reduction in the WACC increases with the amount of debt financing.

Explain the role of debt financing and its impact on firm valuation and cost of capital.

Understand the concept of break-even analysis in financial decision-making.

Recognize the implications of bankruptcy risk on capital structure decisions.

Grasp the strategic considerations in financial structure decisions to maintain flexibility and maximize shareholder value.

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Definitions:

Own Business

The act of focusing on one’s own tasks or affairs, not involving oneself in the matters of others.

Frustration

A feeling of dissatisfaction, often accompanied by anxiety or depression, resulting from unfulfilled needs or unresolved problems.

Daydreaming

The act of allowing one's thoughts to wander to unrelated and often fanciful themes or scenarios, not focused on the present task.

Flunking

Failing to achieve a passing grade or level in an academic setting or test.