Which of the Following Statements Is FALSE

question 88

Multiple Choice

Which of the following statements is FALSE?

• A)An important consequence of leverage is the risk of bankruptcy.
• B)Whether default occurs depends on the cash flows,not on the relative values of the firm's assets and liabilities.
• C)Economic distress is a significant decline in the value of a firm's assets,whether or not it experiences financial distress due to leverage.
• D)Modigliani and Miller's results continue to hold in a perfect market even when debt is risky and the firm may default.

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Definitions:

Over-The-Counter Market

A decentralized market, without a central physical location, where participants trade securities directly between two parties.

New York Stock Exchange

A leading global securities exchange where stocks, bonds, and other financial instruments are bought and sold, based in New York City.

Call Option

An agreement in finance that allows the purchaser the option, but not the duty, to acquire a stock, bond, commodity, or different asset at an agreed-upon price within a predetermined timeframe.

Risk-Free Interest Rate

The return on an investment that is guaranteed, with no risk of financial loss, typically associated with the most secure government bonds.