Issuing Debt Provides Incentives for Managers to Run the Firm

question 103

Multiple Choice

Issuing debt provides incentives for managers to run the firm efficiently because

• A)debt increases the funds available to managers to run the firm.
• B)shareholders prefer to decline new projects to save cash, even if their NPVs are positive.
• C)ownership may remain more concentrated, improving monitoring of management.
• D)managers may take actions that benefit shareholders but harm creditors and lower the value of the firm.

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Definitions:

Current Assets

Assets that are expected to be converted into cash, sold, or consumed within one year or within the business’ normal operating cycle, whichever is longer.

Current Liabilities

Obligations that are due for payment within the next operating cycle or year, including accounts payable and short-term loans.

Warranty Repairs

Services offered for free or at a reduced cost to fix defects in products covered under a warranty period.

Product Warranty Expense

Costs that a company incurs for repairing, replacing, or servicing products under warranty.