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.

---

Definitions:

United States

A country located in North America consisting of 50 states and known for its significant influence on global politics, economy, and culture.

Basic Question

In economics, refers to fundamental queries about how to allocate scarce resources to satisfy human wants.

Economy

The system of production, consumption, and distribution of goods and services within a geographical region.

Goods Produced

Refers to the total set of goods and services created within an economy at a given period of time.