Question

Which one of the following is true? A.Rational investors are likely to infer a higher firm...

Which one of the following is true?

A.Rational investors are likely to infer a higher firm value if a firm is all-equity financed.

B. Rational firms raise debt levels when profits are expected to decline.

C. A firm with low anticipated profits will likely take on a high level of debt.

D.Investors will generally view an increase in leverage as a positive sign of the firm's value.

E. High-growth firms with future positive net present value projects tend to have high levels of debt.

Please answer

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Homework Answers

Answer #1

The amount of debt significantly Lowers the value of the firm so Statement (A) is true which States that Rational investors are likely to infer a higher firm value if a firm is all equity financed.

Rational firm Lowers debt levels when profits are expected to decrease so Statement B is false.

A firm with low profits will prefer lesser of debt financing so Statement C is also false.

An increase in debt level is viewed as a negative sign for firm so Statement D is also false.

High growth firms with positive cash flows from projects are expected to have a low debt as there will be lower of payoff of interest so Statement E is also false.

Only Correct Statement is Statement A.

SO OPTION (A) IS THE CORRECT ANSWER.

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