Which of the Following Statements Is FALSE

question 5

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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