A Company Issues Bonds Saying That It Will Use the Proceeds

question 39

Multiple Choice

A company issues bonds saying that it will use the proceeds for a safe investment.Instead, it uses the proceeds for a risky investment.Which of the following statements is true about this situation.

• A) This will result in a decrease in the value of the debt because the company is riskier.
• B) This will result in a decrease in the value of the equity because the company is riskier.
• C) This will result in a lawsuit from the stockholders because it is bait and switch.
• D) This will cause bondholders to convert their bonds to stock.
• E) Dividends will go up to compensate shareholders for their increased risk.

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Definitions:

Circular Reasoning

A logical fallacy in which the conclusion of an argument is used as a premise of the same argument.

Argumentum Ad Hominem

A logical fallacy where an argument is countered by attacking the character, motive, or other attributes of the person making the argument, rather than addressing the substance of the argument itself.

Sarbanes-Oxley Act

A United States federal law enacted in 2002 that set new or expanded requirements for all U.S. public company boards, management, and public accounting firms, aimed at protecting investors from fraudulent financial reporting.

Code of Ethics

A set of principles and guidelines designed to help professionals conduct business honestly and with integrity.