Which of the Following Statements Is False

question 71

Multiple Choice

Which of the following statements is false?

• A) The presence of financial distress costs can explain why firms choose debt levels that are too high to fully exploit the interest tax shield.
• B) With higher costs of financial distress, it is optimal for the firm to choose lower leverage.
• C) Differences in the magnitude of financial distress costs and the volatility of cash flows can explain the differences in the use of leverage across industries.
• D) At the point D*, where V^L is maximized, the tax savings that result from increasing leverage are just offset by the increased probability of incurring the costs of financial distress.

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Definitions:

Effective-Interest Amortization

A method of calculating the amortized cost of a bond or loan based on the periodic interest rate applied to the carrying amount, resulting in an equal interest expense over the period.

Bonds

Fixed-income investments representing loans to borrowers such as corporations or governments, paid back with interest over time.

Interest Accrual

The process of recognizing interest expense or interest income that has been earned but not yet paid or received.

Earnings Per Share

A company's net profit divided by the number of its common shares outstanding, indicating the profitability on a per-share basis.