Which of the following statements about debt is false?
I.Interest payments reduce the scope for waste by management.
II.Debt creates the possibility of bankruptcy.
III.Debt increases the tendency of shareholders to take gambles.
IV.Debt reduces the cash flows that go to government.
A) I
B) II
C) III
D) IV
E) None of the statements are false.

Question

Quizplus · Accepted Answer

According to Michael Jensen, the interest payments on debt reduce the amount of cash flow that managers can waste, which reduces agency costs.
Debt does create the possibility of bankruptcy. All equity firms cannot go bankrupt.
Jensen and Meckling (1976) argue that debt gives shareholders the incentive to accept long-shot projects.
The interest tax shield is a reduction in the cash flows to government.

Which of the Following Statements About Debt Is False