Which of the Following Statements Is False

question 97

Multiple Choice

Which of the following statements is false?

• A) The optimal level of debt, D*, balances the costs and benefits of leverage.
• B) As the debt level increases, the firm benefits from the interest tax shield (which has present value τ*D).
• C) If the debt level is too large, firm value is reduced due to the loss of tax benefits (when interest exceeds EBIT), financial distress costs, and the agency costs of leverage.
• D) As the debt level increases, the firm faces worse incentives for management, which increase wasteful investment and perks.

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Definitions:

Receivables Balance

The total amount of money owed to a company by its customers for goods or services that have been delivered or used but not yet paid for.

Average Collection Period

The average number of days it takes for a business to receive payments owed by its customers for goods or services sold on credit.

Average Annual Sales

Average annual sales represent the mean revenue a company generates per year over a specified period, commonly used to assess business performance and growth trends.

Credit Policy

Guidelines that a company follows to determine credit limits and terms for customers, which affects how and to whom credit is extended.