Which of the following statements is false? Real estate firms are likely to have

Question

Which of the following statements is false?

       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.

       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.

       There is little incentive to increase debt levels so most firms should pay down debt to avoid potential bankruptcy.

       The probability of financial distress depends on the likelihood that a firm will be unable to meet its debt commitments and therefore default.

Which of the following statements is false?

       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.

       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.

       There is little incentive to increase debt levels so most firms should pay down debt to avoid potential bankruptcy.

       The probability of financial distress depends on the likelihood that a firm will be unable to meet its debt commitments and therefore default.

Explanation / Answer

There is no doubt that the increase in level of debt increases fixed financial obligation of the firm and if the firm will not be able meet its obligation then it may face bankruptcy. But the firm having debt in its capital has an advantage in the term of tax shield. This is because the interest expenses are tax exempt.

Thus, the given third option is false.

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