Which of the Following Statements Is FALSE

question 16

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 can 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:

Legal Status

The classification of an entity or individual under the law, determining their rights, responsibilities, and legal capacity.

Privacy at Work

Refers to the rights and expectations of personal privacy concerning the collection, storage, and dissemination of information by employers about their employees.

Being Monitored

The act of being observed or checked regularly for performance, compliance, or security purposes, often using tools and systems for oversight.

Ethnic Origin

The background from which a person comes, denoted by the country, culture, or social groups to which their ancestors belonged.