The Presence of a Large Amount of Debt Can Encourage

question 9

Multiple Choice

The presence of a large amount of debt can encourage shareholders to take excessive risk because ________.

• A) equity holders are risk seeking by nature
• B) the costs of failure are borne largely by debt holders
• C) debt holders are risk seeking
• D) firm value increases with risk taking

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Definitions:

Step-down Method

An allocation method used in cost accounting to assign overhead costs to different departments based on a hierarchical order.

Labor Hours

The total number of hours worked by employees for which they are compensated, often used as a basis for allocating overhead in cost accounting.

Space Occupied

The amount of physical area taken up by an entity, such as inventory in a warehouse or machinery in a factory.

Step-down Method

A method used in cost accounting to allocate service department costs to production departments in multiple steps, based on the services rendered.