Issuing Debt Instead of New Equity in a Closely Held

question 37

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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Definitions:

Rate of Return

The profit or deficit experienced from an investment during a set timeframe, represented as a percent growth from the initial investment value.

Capital Budgeting

The process of planning and managing a firm's long-term investments in projects and assets, considering their potential returns and risks.

Long-Term Commitment

Refers to obligations or investments that a company plans to hold or is expected to fulfill over an extended period, typically beyond one year.

Large Amounts

This term commonly refers to substantial or significant quantities, often in the context of transactions, investments, or financial operations.