Which One of the Following Statements Is TRUE

question 17

Multiple Choice

Which one of the following statements is TRUE?

• A) When an owner/manager sells stock to an outsider, that outsider now bears some of the costs of the owner/manager's perquisite consumption.
• B) Lenders can't legally prevent a firm from engaging in asset switching.
• C) Firms borrowing money have greater flexibility to use that money when there are debt covenants.
• D) When lenders protect themselves from the risk of asset switching, the firm's WACC can decrease.
• E) A lender calling in a corporate loan and then lending the funds out to a safer borrower is an example of asset switching.

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Definitions:

Accounting Purposes

The reasons or objectives for recording and reporting financial information, such as compliance with legal requirements and informed decision-making.

Separate Entity

A fundamental accounting principle that treats a business as distinct from its owners, creditors, or other businesses.

Corporations

Legal entities recognized by law, formed by individuals or groups to conduct business, which can own assets, incur liabilities, and sell equity.

Initial Stockholders

The original investors or owners of a company’s stock at the time of its issuance.