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:

Variable Manufacturing Cost

Costs that vary directly with the level of production output, such as raw materials and direct labor.

Idle Capacity

The portion of a company's resources or production capacity that is not being used for production or generating revenue.

Variable Production Cost

Costs that change in proportion to the level of production output, such as raw materials and direct labor.

Supervisory Costs

Expenses associated with overseeing and managing employees or a production process.