Which of the Following Statements Is False

question 12

Multiple Choice

Which of the following statements is false?

• A) By including more covenants, issuers increase their costs of borrowing.
• B) Once bonds are issued, equity holders have an incentive to increase dividends at the expense of debt holders.
• C) Covenants may restrict the level of further indebtedness and specify that the issuer must maintain a minimum amount of working capital.
• D) If the covenants are designed to reduce agency costs by restricting management's ability to take negative-NPV actions that exploit debt holders, then the reduction in the firm's borrowing cost can more than outweigh the cost of the loss of flexibility associated with covenants.

---

Definitions:

Normal Rate

A standard or usual level of financial return on investment or interest on loans.

Supply

The total amount of a product or service that is available to consumers at a given price over a specific period.

Profits

The financial gain obtained when the revenues generated from business activities exceed the expenses, costs, and taxes involved in sustaining the activity.

Industry Supply Curve

A graphical representation showing the relationship between the price of a good and the total output of the industry at various prices.