Which of the Following Is True of the Financial Distress

question 14

Multiple Choice

Which of the following is true of the financial distress of a company and hedging?

• A)Firms that face high financial distress costs have greater incentives to hedge.
• B)Hedging eliminates the possibility of financial distress.
• C)If the cost of hedging is sufficiently large,and if hedging reduces variance very little,then hedging decreases the probability of financial distress.
• D)Hedging has no impact on the cash flows of an unlevered firm and on the costs of financial distress.

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Definitions:

Probability

An evaluation of the chance an event has to take place, using a scale from 0 to 1.

Probability Distribution

A mathematical function that describes the likelihood of obtaining the possible values that a random variable can assume.

Owns More Than One

Refers to an individual or entity possessing more than one of something, suggesting multiple ownerships.

Union of Events

In probability, the set of outcomes that belong to at least one of several events.