Issuing Debt Instead of New Equity in a Closely Held

question 27

Multiple Choice

Issuing debt instead of new equity in a closely held firm is most apt to cause:

• A)the owner-manager to work less hard and shirk duties.
• B)the owner-manager to consume more perquisites because the cost is passed to the debtholders.
• C)both more shirking and perquisite consumption since the government provides a tax shield on debt.
• D)agency costs to fall as owner-managers do not need to worry about other shareholders.
• E)the owner-manager to reduce shirking and perquisite consumption.

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