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.

---

Definitions:

Escalation of Commitment

Is a pattern of behavior in which an individual or group continues to invest in a decision despite evidence of its ineffectiveness or the likelihood of negative outcomes.

Perceptual Defense

The psychological mechanism by which individuals protect themselves from information or stimuli perceived as threatening.

Decision Maker

An individual or group responsible for making choices that will impact the organization.

Visuals

Graphic elements such as charts, graphs, and images used in communication materials to supplement text, making information easier to understand and more engaging.