All of the Following Statements Are Correct Except

question 127

Multiple Choice

All of the following statements are correct except:

• A)The tax deductibility of debt becomes more important to firms with large nondebt tax shields such as foreign tax credits granted by the U.S.government to firms that pay taxes to foreign governments.
• B)As the debt/total asset ratio falls, or as earnings become less volatile, the firm will face higher borrowing costs, driven upward by bond investors requiring higher yields to compensate for additional risk.
• C)The static tradeoff hypothesis states that firms will balance the advantages of equity (its lower cost and tax-deductibility of dividends) with its disadvantages (greater possibility of bankruptcy and the value of explicit and implicit bankruptcy costs).
• D)Agency costs increase the optimal level of debt financing for a firm above the level that would be appropriate if agency costs were zero.
• E)None of the above statements are correct.

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Definitions:

Sales Level

The total volume or amount of sales achieved by a company within a specified period.

Payback Period

The length of time required to recover the cost of an investment, calculated by dividing the initial investment by the annual cash inflow.

Break-even Point

The juncture where the overall expenses match the total income, leading to neither a net profit nor a loss in business operations.

Base Case Level

A standard or initial set of conditions used as a reference point for financial or operational planning and analysis.