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.

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Definitions:

Person-Fit Models

Psychological models that emphasize the compatibility between an individual’s characteristics and the demands or attributes of a specific environment.

Job Interaction

The dynamics and relationships between employees or between employees and their tasks in the workplace.

Personal Disposition

An individual's inherent qualities of mind and character that influence their behavior and reactions.

Social Information Processing

The way individuals interpret, analyze, and incorporate information about the social world.