Consider the following two statements: (i) The possibility of ﬁnancial distress, and bankruptcy in particular, arises with debt ﬁnancing, and
Lowers value.
(ii) Because the yield on government debt can be substantially below the yield on taxable debt, this
Subsidy can add value to an investment project.

Question

Quizplus · Accepted Answer

Both statements are correct. Statement (i) highlights the risk of financial distress and bankruptcy associated with debt financing, which can lower the value of a firm due to the costs and risks involved. Statement (ii) points out that the lower yield on government debt, compared to taxable debt, can act as a subsidy for an investment project, thereby adding value.

Consider the Following Two Statements: (I) the Possibility of ﬁNancial