Which of the Following Statements Is False

question 68

Multiple Choice

Which of the following statements is false?

• A) The Law of One Price implies that leverage will affect the total value of the firm under perfect capital market conditions.
• B) In the absence of taxes or other transaction costs, the total cash flow paid out to all of a firm's security holders is equal to the total cash flow generated by the firm's assets.
• C) With perfect capital markets, leverage merely changes the allocation of cash flows between debt and equity, without altering the total cash flows of the firm.
• D) In a perfect capital market, the total value of a firm is equal to the market value of the total cash flows generated by its assets and is not affected by its choice of capital structure.

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Definitions:

Assets

Items of value owned by a person or company, including physical property, financial holdings, and intangible items that can be converted into cash.

Cash Budgets

Financial plans that forecast a company's cash inflows, outflows, and net cash balance for a specific period.

Acid-Test Ratio

A financial metric that evaluates a company's ability to pay off its current liabilities with its easily liquidated assets, also known as the quick ratio.

Current Ratio

A liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year, calculated as current assets divided by current liabilities.