Which of the following statements is true? A. Financial theorists have resolved

Question

Which of the following statements is true?

A. Financial theorists have resolved the issue of how to maximize firm value by altering the capital structure.

B.  highly leveraged firm has less flexibility to take advantage of investment opportunities than companies with low debt ratios.

C.Firms with a high degree of operating leverage usually maintain high debt ratios.

D. A firm's longminusterm earnings are more important than its nearminusterm
cash flows in determining the amount of debt to issue.

E. Firms increase their debt usage when markets overvalue the firm.

Explanation / Answer

B is correct.

Highly leveraged firm have to repay their debt to lenders and so, most of their cash flows are stuck with financing their debt. Hence, they have limited flexibility to take advantage of investment opportunities in comparison to low debt ratios firm who can borrow more and invest in new investment opportunities.

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