Issuing Debt Instead of New Equity in a Closely Held

question 37

Multiple Choice

Issuing debt instead of new equity in a closely held firm more likely:

• A) causes the owner-manager to work less hard and shirk their duties as they have less capital at risk.
• B) causes the owner-manager to consume more perquisites because the cost is passed to the debtholders.
• C) causes both more shirking and perquisite consumption since the government provides a tax shield on debt.
• D) causes agency costs to fall as owner-managers do not need to worry about other shareholders.
• E) causes the owner-manager to reduce shirking and perquisite consumption as the excess cash flow must be used to meet debt payments.

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Definitions:

Auditory stimuli

Sounds or noises that provoke a response or reaction from the auditory system.

Brain

An organ of the central nervous system where most functions of control and processing happen.

Reflex

A predictable automatic response to stimuli.

Motor response

Refers to the body's reaction to stimuli, involving nerves and muscles.