Which of the Following Statements Is False

question 55

Multiple Choice

Which of the following statements is false?

• A) The higher the firm's leverage, the more the firm exploits the tax advantage of debt, and the lower its WACC.
• B) Corporate taxes lower the effective cost of debt financing, which translates into a reduction in the weighted average cost of capital.
• C) Because the firm's free cash flow is computed without considering the firm's leverage, we account for the benefit of the interest tax shield by calculating the WACC using the before-tax cost of debt.
• D) The reduction in the WACC increases with the amount of debt financing.

---

Definitions:

Limited Liability Company

An organizational model that merges the direct tax benefits of a partnership or single ownership with the reduced legal responsibility of a corporation.

Foreign Corporation

A corporation created by or organized under the laws of a state other than the one in which it is operating.

Certificate of Authority

A document issued by a governmental authority granting permission to a business entity to operate in a specific jurisdiction.

Incorporate

To form a legal corporation, allowing a business to operate as a separate legal entity from its owners, with its own rights and liabilities.