Which of the Following Statements Is False

question 28

Multiple Choice

Which of the following statements is false?

• A) The agency costs of debt can arise only if there is no chance the firm will default and impose losses on its debt holders.
• B) Agency costs represent another cost of increasing the firm's leverage that will affect the firm's optimal capital structure choice.
• C) An under-investment problem occurs when shareholders choose to not invest in a positive-NPV project.
• D) When a firm faces financial distress, it may choose not to finance new, positive-NPV projects.

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Definitions:

Financial Statement

A structured report of the financial performance and position of a company, including the balance sheet, income statement, and cash flow statement.

Temporary/Permanent

Categories of accounts in accounting: temporary accounts are closed at the end of the fiscal year, while permanent accounts are carried over across accounting periods.

General Journal Entries

Records of financial transactions in chronological order as part of the double-entry bookkeeping system.

Effective Interest Rate

The real rate of interest earned or paid on an investment, loan, or other financial product, taking into account the effects of compounding.