Which Statement Is Not True in Relation to Asset Substitution

question 24

Multiple Choice

Which statement is not true in relation to asset substitution as described in the shareholders-debtholders agency relationship?

• A)Managers have incentives to accept debt finance and invest in higher risk assets to increase the potential returns to shareholders
• B)Lenders are generally risk preferers
• C)When investments in high-risk assets cause financial distress,shareholders are liable only for the amounts unpaid on their shares
• D)Lenders' price debt is based on the expectations that firms will not invest in assets that have higher risk than that which is acceptable to the lenders

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