Question

9. Which of the following statements is​ FALSE? A. The probability of financial distress depends on the likelihood that a firm will be unable to meet its debt commitments and therefore default. B. Firms whose value and cash flows are very volatile​ (for example, semiconductor​ firms) must have much higher levels of debt to avoid a significant risk of default. C. For low levels of​ debt, the risk of default remains low and the main effect of an increase in leverage is an increase in the interest tax​ shield, which has present value tau ​*​D, where tau ​* is the effective tax advantage of debt. D. Real estate firms are likely to have low costs of financial​ distress, as much of their value derives from assets that can be sold relatively easily.

Answer 1

Firms whose value and cash flows are very volatile​ (for example, semiconductor​ firms) must have much higher levels of debt to avoid a significant risk of default.

This statement is FALSE.

Explanation:

Firms with volatile cash flows shouldn't have higher levels of debt as during the time of low cash outflow firms will not be able to meet the interest expenses of debt, so these firms should have relatively lower amount of debt.