Which of the following statements is FALSE?
A)Rather than set debt according to a target debt-equity ratio or interest coverage level,a firm may adjust its debt according to a fixed schedule that is known in advance.
B)When we relax the assumption of a constant debt-equity ratio,the equity cost of capital and WACC for a project will change over time as the debt-equity ratio changes.
C)When we relax the assumption of a constant debt-equity ratio,the APV and FTE methods are difficult to implement.
D)If a firm is using leverage to shield income from corporate taxes,then it will adjust its debt level so that its interest expenses grow with its earnings.

Question

Quizplus · Accepted Answer

When we relax the assumption of a constant debt-equity ratio, the APV and FTE methods are still valid and can be implemented. In fact, these methods are designed precisely to handle changes in the capital structure of a firm over time. Therefore, statement C is false. Statements A, B, and D are true. A firm may adjust its debt according to a fixed schedule that is known in advance, and the equity cost of capital, WACC, and debt level will all change over time if the debt-equity ratio is not constant. Additionally, if a firm is using leverage to shield income from taxes, it will adjust its debt level so that its interest expenses grow with its earnings.

Which of the Following Statements Is FALSE