Which of the Following Statements Is False

question 27

Multiple Choice

Which of the following statements is false?

• A) The tax deductibility of interest lowers the effective cost of debt financing for the firm.
• B) When a firm uses debt financing, the cost of the interest it must pay is offset to some extent by the tax savings from the interest tax shield.
• C) With tax-deductible interest, the effective after-tax borrowing rate is r(τ_C).
• D) The WACC represents the cost of capital for the free cash flow generated by the firm's assets.

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Definitions:

Short Run

A period during which at least one input (e.g., plant size, technology) is fixed, and firms can adjust only the variable inputs (e.g., labor).

Excise Tax

A tax imposed on specific goods, services, or activities, often included in the price of items like gasoline, alcohol, and tobacco.

Tax Wedge

The difference between the amount a buyer pays and the amount a seller receives for a good or service due to taxation.

Sellers

Individuals or entities that offer goods or services for sale in the market.