Which of the Following Statements Is FALSE

question 102

Multiple Choice

Which of the following statements is FALSE?

• A)The optimal level of debt D*,balances the costs and benefits of leverage.
• B)As the debt level increases,the firm benefits from the interest tax shield (which has present value τ*D).
• C)If the debt level is too large firm value is reduced due to the loss of tax benefits (when interest exceeds EBIT),financial distress costs,and the agency costs of leverage.
• D)As the debt level increases,the firm faces worse incentives for management,which increase wasteful investment and perks.

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Definitions:

Expected Rate Of Profit

The anticipated return on an investment, calculated based on the potential risks and rewards associated with the investment.

Money Invested

Funds allocated for the purpose of generating income or profit through purchases of assets, securities, or other financial instruments.

Rate Of Interest

The charge, quantified as a percentage of the principal, that a borrower pays to a lender for the privilege of using assets.

Expected Profit Rate

The anticipated return on investment, calculated based on potential revenues and costs.