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.

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Definitions:

Net Income

The profit of a company after all expenses and taxes have been deducted from total revenue.