Which of the Following Statements Is FALSE

question 79

Multiple Choice

Which of the following statements is FALSE?

• A)Once bonds are issued, equity holders have an incentive to increase dividends at the expense of debt holders.
• B)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.
• C)Covenants may restrict the level of further indebtedness and specify that the issuer must maintain a minimum amount of working capital.
• D)By including more covenants, issuers increase their costs of borrowing.

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Definitions:

Compounded Annually

The process of calculating interest on both the initial principal and the accumulated interest from previous periods on an annual basis.

Yearly Contributions

These are amounts of money contributed to any type of savings or investment plan on an annual basis.

Rate of Interest

The percentage of the principal charged by the lender for the use of its money.

Compounded Quarterly

Interest calculation method where the interest is added to the principal four times annually, leading to increased growth over time due to the quarterly compounding effect.