Which of the Following Statements Is False

question 53

Multiple Choice

Which of the following statements is false?

• A) If the value of the firm's assets exceeds the required debt payment, debt holders are fully repaid.
• B) Another way to view corporate debt is as a portfolio of riskless debt and a short position in a call option on the firm's assets with a strike price equal to the required debt payment.
• C) Viewing debt as an option portfolio is useful as it provides insight into how credit spreads for risky debt are determined.
• D) You can think of the debt holders as owning the firm and having sold a call option with a strike price equal to the required debt payment.

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Definitions:

Bad Debts Expense

The cost associated with the portion of accounts receivable that is estimated to be uncollectible during a fiscal period.

Uncollectible Account

A receivable that is considered uncollectible from a debtor, usually displayed as an expense.

Allowance for Doubtful Accounts

A contra-account reducing accounts receivable to reflect the amount expected not to be collected due to customers' defaulting.

Gross Amount

The total amount before any deductions, such as taxes, expenses, or discounts, are subtracted.