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.

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Definitions:

Disciplinary Action

Measures taken by an organization against its members or employees who have violated rules or standards, which can range from warnings to termination.

Substandard Wages

refer to compensation levels below the minimum considered acceptable by law or industry standards for a given region or sector.

Contract Violations

Acts that breach the terms agreed upon in a contract, leading to disputes that may require legal action to resolve.

Union Dues

Membership fees paid by workers to labor unions to support the union's operations and activities.