A Company Issues Bonds Saying That It Will Use the Proceeds

question 36

Multiple Choice

A company issues bonds saying that it will use the proceeds for a safe investment. Instead, it uses the proceeds for a risky investment. Which of the following statements is true about this situation.

• A) this will result in a decrease in the value of the debt because the company is riskier.
• B) this will result in a decrease in the value of the equity because the company is riskier.
• C) this will result in a lawsuit from the stockholders because it is bait and switch.
• D) this will cause bondholders to convert their bonds to stock.
• E) dividends will go up to compensate shareholders for their increased risk.

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Definitions:

Profit

The financial gain achieved when the revenue from business activities exceeds the expenses, costs, and taxes involved in sustaining the activity.

Rent-seeking Behavior

Actions by individuals or firms to increase their own wealth without creating new wealth or value, often through manipulating the social or political environment.

Single Payer

A healthcare finance mechanism where a single public or quasi-public agency organizes health care financing, but delivery of care remains largely in private hands.

Budget Deficit

A situation where a government's expenditures surpass its revenues within a specific fiscal period, leading to borrowing or debt accumulation.