Which of the Following Statements Regarding Bonds Is FALSE

question 29

Multiple Choice

Which of the following statements regarding bonds is FALSE?

• A)By including more covenants,issuers increase their costs of borrowing.
• B)Once bonds are issued,equity holders have an incentive to increase dividends at the expense of debt holders.
• C)Covenants may restrict the level of further indebtedness and specify that the issuer must maintain a minimum amount of working capital.
• D)If the covenants are designed to reduce agency costs by restricting management's ability to take negative NPV actions that exploit debt holders,then the reduction in the firm's borrowing cost can more than outweigh the cost of the loss of flexibility associated with covenants.

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Definitions:

Liability Account

A financial accounting account that represents obligations to pay debts or amounts owed to others.

Capital Account

An account showing the net worth of a business entity, including its equity and investments.

Asset Account

An account that records the assets owned by a company, showing their value on the balance sheet.

Cash Balance

The amount of cash or cash equivalents a company or individual possesses at any given time.