Which of the Following Statements Is FALSE

question 66

Multiple Choice

Which of the following statements is FALSE?

• A)A biotech firm might be developing drugs with tremendous potential,but it has yet to receive any revenue from these drugs.Such a firm will not have taxable earnings.In that case,a tax-optimal capital structure does not include debt.
• B)No corporate tax benefit arises from incurring interest payments that regularly exceed EBIT.
• C)The optimal level of leverage from a tax saving perspective is the level such that interest equals EBIT.
• D)In general,as a firm's interest expense approaches its expected taxable earnings,the marginal tax advantage of debt increases,limiting the amount of equity the firm should use.

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Definitions:

X-inefficiency

The difference between efficient behaviors of businesses in a competitive market and their actual behaviors due to lack of competitive pressure.

Decreasing-cost Industry

An industry in which the costs of production decrease as the industry grows and output increases.

Decreasing-cost Industry

An industry in which the costs of production per unit decrease as the industry grows and output increases.

Long-run Equilibrium

A state in which all factors of production and outputs are adjusted so that prices, supply, and demand are stable over time.