Which of the Following Statements Is False

question 25

Multiple Choice

Which of the following statements is false?

• A) Firms with steady, reliable cash flows, such as utility companies, are able to use high levels of debt and still have a very low probability of default.
• B) If there were no costs of financial distress, the value of the firm would continue to increase with increasing debt until the interest on the debt exceeds the firm's earnings before interest and taxes and the tax shield is exhausted.
• C) The costs of financial distress reduce the value of the levered firm, V^L. The amount of the reduction decreases with the probability of default, which in turn increases with the level of the debt D.
• D) The tradeoff theory states that firms should increase their leverage until it reaches the level D* for which V^L is maximized.

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Definitions:

Publishers

Entities that produce and distribute content or information in various formats, such as books, music, and digital media.

Public's Trust

The level of confidence that the general population has in the integrity, fairness, and competence of an organization or government.

Group Shopping

A purchasing approach where a group of individuals come together, often through online platforms, to buy products in bulk or to avail discounts offered for group purchases.

LivingSocial

An online marketplace that allows users to buy and share things to do in their city, offering discounted gift certificates usable at local or national companies.