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Mark the only incorrect statement about the effect of bankruptcy risks. Group of answer choices Bankruptcy...

Mark the only incorrect statement about the effect of bankruptcy risks.

Group of answer choices

Bankruptcy risk makes the afte-tax cost of debt increasing in the debt-equity ratio

Bankruptcy risk makes the WACC a U-shaped function of the debt-equity ratio

Financial distress cost reduces the value of the firm if the debt is too large

Bankruptcy risk increases the unlevered cost of capital

Solutions

Expert Solution

The incorrect answer is mentioned below :

The last option is incorrect - "Bankruptcy risk increases the unlevered cost of capital"

Because the bankruptcy not increase the unlevered cost of capitals as the debt is falling under the levered part and not the unlevered part the unlevered cost will be increased as the debt increase the cost of Capital and all other options are correct as they are representing the truth in the event of bankruptcy of the company.

jeff jeffy answered 2 years ago
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