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:

Common Law

A legal system based on precedents and judicial decisions rather than statutory laws.

Lessee

An individual or entity who leases an asset from another, the lessor, under the terms of a lease agreement.

Possession and Use

The act of holding property and utilizing it, which may imply certain rights or obligations under the law.

Lease

A contract by which one party conveys land, property, services, or the use of assets to another party for a specified time, usually in return for a periodic payment.