All of the Following Statements Are Correct Except

Multiple Choice

All of the following statements are correct except:

A) The tax deductibility of debt becomes less important to firms with large nondebt tax shields such as foreign tax credits granted by the U.S.government to firms that pay taxes to foreign governments.
B) As the debt/total asset ratio falls, or as earnings become less volatile, the firm will face higher borrowing costs, driven upward by bond investors requiring higher yields to compensate for additional risk.
C) The static tradeoff hypothesis states that firms will balance the advantages of debt (its lower cost and tax-deductibility of interest) with its disadvantages (greater possibility of bankruptcy and the value of explicit and implicit bankruptcy costs) .
D) Agency costs reduce the optimal level of debt financing for a firm below the level that would be appropriate if agency costs were zero.
E) All of the above statements are correct.
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