Use the Information for the Question(s) Below

question 5

Multiple Choice

Use the information for the question(s) below.
The current price of KD Industries' stock is $20. In the next year the stock price will either go up by 20% or go down by 20%. KD pays no dividends. The one year risk-free rate is 5% and will remain constant.
-Which of the following statements is false?

• A) For companies with high debt-to-equity ratios, the approximation that the beta of debt is zero is unrealistic; such corporations have a positive probability of bankruptcy, and this uncertainty usually has systematic components.
• B) When the debt is risky, the firm's equity is always in-the-money; thus Δ = 1.
• C) If we let A be the value of the firm's assets, E be the value of equity, and D be the value of debt, then because equity is a call option on the assets of the firm, E = SΔ + B with A = E + D = S.
• D) Equity can be viewed as a call option on the firm's assets.

---

Definitions:

Global Sources of Capital

Various international avenues and mechanisms through which businesses can secure funding for operations or expansion.

International Convergence

A goal or process of harmonizing accounting standards and practices across different countries to improve comparability and transparency of financial reporting globally.

Accounting Standards

Formal guidelines and rules for accounting practices that determine how financial statements are prepared and presented.

FASB

Financial Accounting Standards Board, an independent nonprofit organization responsible for establishing accounting and financial reporting standards for companies and nonprofit organizations in the United States.