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:

Price Ratio

The relative price of one good or service in comparison to another, often used in economic analysis and decision-making.

Indifference Curve

A graph that shows combinations of two goods between which a consumer is indifferent, reflecting equal levels of utility for the consumer.

Total Utility

The total satisfaction or benefit received by consuming a given total amount of a good or service.

Money Income

The total amount of monetary earnings or revenue received by an individual or entity, usually measured within a specific period.