Issuing Debt Instead of New Equity in a Closely Held

question 25

Multiple Choice

Issuing debt instead of new equity in a closely held firm more likely:

• A)causes the owner-manager to work less hard and shirk their duties as they have less capital
• At risk.
• B)causes the owner-manager to consume more perquisites because the cost is passed to the
• Debtholders.
• C)causes both more shirking and perquisite consumption since the government provides a tax
• Shield on debt.
• D)causes agency costs to fall as owner-managers do not need to worry about other
• Shareholders.
• E)causes the owner-manager to reduce shirking and perquisite consumption as the excess
• Cash flow must be used to meet debt payments.

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