Question

Which of the following is not a true statement? a. Companies that are believed to have high bankruptcy risk generally receive low credit ratings and must pay a higher interest rate for borrowing. b. As a company's level of debt increases, the risk of bankruptcy increases. c. Interest expense incurred when borrowing money, as well as dividends paid to stockholders, are both tax-deductible. d. The mixture of liabilities and stockholders' equity a business uses is called its capital structure.

Answer 1

Interest expense incurred when borrowing money, as well as dividends paid to stockholders, are both tax-deductible is not a true statement. It does not involve other companies getting payed for one companies sales.

Answer 2

Answer: Option C

Explanation: In case of companies having both debt and equity in its capital structure only the interest paid on debt is deductible to tax and the dividends distribution to stockholders is done from the net income which is computed after deducting tax.

Thus, from the above explanation we can conclude that option c is incorrect statement.