Which of the Following Statements Is False

question 46

Multiple Choice

Which of the following statements is false?

• A) Because insurance reduces the risk of financial distress, it can relax this tradeoff and allow the firm to increase its use of debt financing.
• B) By lowering the volatility of the stock, insurance discourage concentrated ownership by an outside director or investor who will monitor the firm and its management.
• C) When a firm is subject to graduated income tax rates, insurance can produce a tax savings if the firm is in a higher tax bracket when it pays the premium than the tax bracket it is in when it receives the insurance payment in the event of a loss.
• D) In a perfect market without other frictions, insurance companies should compete until they are just earning a fair return and the NPV from selling insurance is zero. The NPV is zero if the price of insurance equals the present value of the expected payment; in that case, we say the price is actuarially fair.

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Definitions:

Firm Offer

An offer made in writing and giving assurances that it will be irrevocable for not longer than three months despite a lack of consideration for the irrevocability.

Statute of Frauds

The Statute of Frauds is a legal principle that requires certain types of contracts to be in writing and signed by the party to be charged, in order to be enforceable.

CISG

The United Nations Convention on Contracts for the International Sale of Goods, a treaty that provides a uniform and fair regime for contracts for the international sale of goods.

Corporate Stocks

Equity securities that represent ownership shares in a corporation, entitling holders to a share of the corporation's profits through dividends.