Which of statements a) through c) regarding costs of financial distress is FALSE?
A) Both debt and equity unambiguously benefit from corporate risk hedging.
B) Hedging can increase expected cash flows by reducing the costs of financial distress.
C) Hedging can reduce debtholders' required return and hence the cost of capital to the firm.
D) All of the above are true.
E) None of the above are true.

Question

Quizplus · Accepted Answer

Statement A is false because while hedging can benefit debt holders by reducing the costs of financial distress, it may not always benefit equity holders as it can also reduce their potential gains from taking on corporate risk.

Which of Statements A) Through C) Regarding Costs of Financial