Which of the Following Is True of a Firm's Capital

question 4

Multiple Choice

Which of the following is true of a firm's capital structure and its value?

• A)An increase in a firm's debt ratio is considered a favourable signal because it indicates that managers believe the firm will be generating taxable earnings in the future.
• B)Under all circumstances,an increase in a firm's debt ratio is considered an unfavourable signal because it indicates that they are overly concerned about their short-term liquidity.
• C)Though managers understand that their firm's share price is likely to respond favourably to higher leverage ratios,they do not have an incentive to choose higher leverage.
• D)An advantage for unlevered firms over levered firms is that any critical business decision is perceived as a favourable signal.