Which of the Following Statements Is FALSE

question 79

Multiple Choice

Which of the following statements is FALSE?

• A)Real estate firms are likely to have low costs of financial distress,as much of their value derives from assets that can be sold relatively easily.
• B)For low levels of debt,the risk of default remains low and the main effect of an increase in leverage is an increase in the interest tax shield,which has present value τ*D,where τ* is the effective tax advantage of debt.
• C)Firms whose value and cash flows are very volatile (for example,semiconductor firms)must have much higher levels of debt to avoid a significant risk of default.
• D)The probability of financial distress depends on the likelihood that a firm will be unable to meet its debt commitments and therefore default.

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Definitions:

Operating Activities

Activities that constitute the primary or main activities of a business, like sales, provision of services, production, etc., which are reflected in the cash flow from operating activities in the financial statements.

Net Income

The amount of money a company earns after deducting all its expenses, taxes, and costs from its total revenue.

Net Cash

The net cash position resulting from deducting cash outflows from cash inflows.

Investing Activities

Financial transactions related to the purchase and sale of long-term assets and other investments, reflecting how a company allocates its resources to generate future growth and income.