The Following Statements About Asset Substitution Are True Except For

question 28

Multiple Choice

The following statements about asset substitution are true except for:

• A) Managers have incentives to use debt finance to invest in higher-risk assets with the expectation of obtaining higher returns for shareholders.
• B) Lenders are willing to share higher returns earned when managers invest in higher-risk projects.
• C) A debt covenant that restricts investment opportunities of the entity can reduce the entity's borrowing costs.
• D) Asset substitution arises when an entity uses borrowed funds to invest in higher risk assets than those agreed upon in the debt contract.

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Definitions:

Environmental Scanning

The process of systematically collecting, analyzing, and interpreting data about trends, events, and conditions in the environment that might affect an organization's future.

Consumer Ethnocentrism

The belief held by some consumers that purchasing foreign-made products is wrong or harmful to the local economy.

Major External Factors

Key influences originating outside of an organization that can significantly impact its performance and strategy, such as economic, social, technological, and political conditions.

Direct Competition

Two or more businesses offering products or services that directly compete against each other.