Debt Can Reduce Agency Costs Between Shareholders and Management,but

question 76

Multiple Choice

Debt can reduce agency costs between shareholders and management,but

• A)only if the firm is totally up to its eyeballs in debt.
• B)only to the extent that the firm can commit all of its free cash flow.
• C)excessive debt can create its own agency conflicts.
• D)debt is best used as a corporate governance mechanism by young companies with limited cash reserves.

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Definitions:

Capital Goods

Long-term assets used in the production of goods and services, such as machinery, buildings, and equipment.

Consumer Goods

Products that are bought for consumption by the average consumer.

Capital Goods

Long-lasting goods acquired by businesses to create goods and services, as opposed to being directly consumed by consumers.

Opportunity Cost

The act of losing potential profits from other pathways when one route is taken.