Which of the Following Statements Is False

question 65

Multiple Choice

Which of the following statements is false?

• A) The tradeoff theory weighs the costs of debt that result from shielding cash flows from taxes against the benefits from the effects of financial distress associated with leverage.
• B) Leverage has costs as well as benefits.
• C) According to the tradeoff theory, the total value of a levered firm equals the value of the firm without leverage plus the present value of the tax savings from debt, less the present value of financial distress costs.
• D) Firms have an incentive to increase leverage to exploit the tax benefits of debt. But with too much debt, they are more likely to risk default and incur financial distress costs.

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Definitions:

Wattless Power

See reactive power.

RL Circuit

An electrical circuit consisting of resistors (R) and inductors (L) used to filter signals or store energy.

Power Values

Quantitative measurements that represent the rate at which energy is used, produced, or transferred within a system.

Reactive Power

The portion of electricity that establishes and sustains the electric and magnetic fields in a circuit, measured in volt-amperes reactive (VAR).