The Presence of Financial Distress Costs Is Not Sufficient to Explain

question 76

True/False

The presence of financial distress costs is not sufficient to explain why firms choose debt levels that are too low to exploit the interest tax shield.

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Definitions:

Variable Cost

Costs that change in proportion to the level of production or business activity, such as materials and labor.

Variable Cost

Costs that vary in direct proportion to changes in levels of production or business activity, such as materials and labor.

Fixed Cost

A cost that does not change with the volume of sales.

Fixed Costs

Expenses that do not change in proportion to the activity of a business, such as rent, salaries, and loan payments.