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Explanation:
Option B is incorrect because reducing the volatility of earnings and cash flows lowers the probability of financial distress and bankruptcy. This financial stability typically allows a firm to increase its debt capacity, not reduce it, as lenders will be more comfortable issuing credit to a company with predictable cash flows.
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Q.84 GBL Corp. has presented to its board of directors four advantages of hedging risk. Which of the following advantages is most likely incorrect?
A
Hedging risk exposure can help the firm lower its cost of capital.
B
Hedging reduces the volatility of earnings/cash flows and allows the firm to reduce its debt capacity.
C
Hedging with swaps and options is at times cheaper than insurance.
D
Hedging improves financial planning by the board of directors.