Which of the Following Statements Is False

question 27

Multiple Choice

Which of the following statements is false?

• A) Debt holders are not foolish-they recognize that when the firm defaults, they will not be able to get the full value of the assets. As a result, they will pay less for the debt initially.
• B) The costs of financial distress represent an important departure from Modigliani and Miller's assumption of perfect capital markets.
• C) Levered firms risk incurring financial distress costs that reduce the cash flows available to investors.
• D) When securities are fairly priced, the original shareholders of a firm pay the future value of the costs associated with bankruptcy and financial distress.

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Definitions:

Design Defects

Flaws in the planning or design of a product that result in it being unsafe or failing to perform as intended.

Product Liability

The legal responsibility of manufacturers and sellers for defects or hazards in products that cause harm.

Restatement (Third)

A reference to the third series of restatements of American law, which are compilations summarizing the court rulings on various legal subjects.

Product Defects

Flaws or errors in a product that make it unsafe or unfit for its intended use, possibly leading to recalls or liability issues for the manufacturer.