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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Definitions:

Overhead Allocation Base

A measure used to distribute overhead costs among various products or service units within a business.

Machine Hours

A measure of the amount of time machines are operated in the production process, commonly used as an allocation base for assigning overhead costs.

Indirect Labor

Labor costs attributed to anything other than the direct manufacturing of goods or provision of services, such as maintenance, supervision, and administrative tasks.

Factory Utilities

Expenses incurred for electricity, gas, water, and sewage services used in the operation of a manufacturing plant or factory.