All of the following statements are correct except:
A)The tax deductibility of debt becomes more important to firms with large nondebt tax shields such as foreign tax credits granted by the U.S.government to firms that pay taxes to foreign governments.
B)As the debt/total asset ratio falls, or as earnings become less volatile, the firm will face higher borrowing costs, driven upward by bond investors requiring higher yields to compensate for additional risk.
C)The static tradeoff hypothesis states that firms will balance the advantages of equity (its lower cost and tax-deductibility of dividends) with its disadvantages (greater possibility of bankruptcy and the value of explicit and implicit bankruptcy costs).
D)Agency costs increase the optimal level of debt financing for a firm above the level that would be appropriate if agency costs were zero.
E)None of the above statements are correct.

Question

Quizplus · Accepted Answer

The Answer of All of the following statements are correct except:
A)The tax deductibility of debt becomes more important to firms with large nondebt tax shields such as foreign tax credits granted by the U.S.government to firms that pay taxes to foreign governments.
B)As the debt/total asset ratio falls, or as earnings become less volatile, the firm will face higher borrowing costs, driven upward by bond investors requiring higher yields to compensate for additional risk.
C)The static tradeoff hypothesis states that firms will balance the advantages of equity (its lower cost and tax-deductibility of dividends) with its disadvantages (greater possibility of bankruptcy and the value of explicit and implicit bankruptcy costs).
D)Agency costs increase the optimal level of debt financing for a firm above the level that would be appropriate if agency costs were zero.
E)None of the above statements are correct.

All of the Following Statements Are Correct Except