Which of the Following Statements Is False

question 27

Multiple Choice

Which of the following statements is false?

• A) Debt holders are not foolish-they recognize that when the firm defaults, they will not be able to get the full value of the assets. As a result, they will pay less for the debt initially.
• B) The costs of financial distress represent an important departure from Modigliani and Miller's assumption of perfect capital markets.
• C) Levered firms risk incurring financial distress costs that reduce the cash flows available to investors.
• D) When securities are fairly priced, the original shareholders of a firm pay the future value of the costs associated with bankruptcy and financial distress.

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Definitions:

Circuit Current

The flow of electric charge in a closed path or circuit, typically measured in amperes.

Volt-Amperes-Reactive

A unit of measure for reactive power in an electrical system, indicating the non-working power in an AC circuit.

Reactive Power

The component of electrical power that does not perform any work, typified by its presence in AC circuits and measured in Volt-Amps Reactive (VAR).

Inductive Reactance

The opposition that inductance offers to alternating current, dependent on the frequency of the current.