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:

Rough Endoplasmic Reticulum

A network of membrane-bound tubules and sacs studded with ribosomes, involved in protein synthesis and folding.

Cell Theory

A fundamental principle in biology stating that all living things are composed of cells, cells are the basic units of life, and all cells come from pre-existing cells.

Physiological Functions

The biological processes and activities carried out by the organs and systems of an organism to maintain life.

Preexisting Cells

The principle that cells are formed from the division of existing cells, as stated in the cell theory.