Which of the Following Statements Is NOT an Example of the Agency

question 70

Multiple Choice

Which of the following statements is NOT an example of the agency cost of debt?

• A) ABC Company shareholders pressure management to invest in very risky projects in hopes that one of the investments might pay off. The company is highly leveraged, so shareholders have little to lose.
• B) ABC Company has a large amount of debt but very few investment opportunities. The board of directors decides to pay out a large special dividend, and the company subsequently enters insolvency. Lenders collect about 60 per cent of the face value of the debt.
• C) ABC Company is very close to financial distress. The company has a positive-NPV investment opportunity, but even with the project the company is likely to enter insolvency. Investors refuse to invest the additional funds necessary to pursue the project, even though it has a positive NPV.
• D) Investors are unsure of the value for ABC Company. ABC Company decides to issue equity to pay down debt. The market assumes that ABC Company's managers are issuing equity because they think that the company's shares are overvalued. As a result, the company's share price falls when the equity issue is announced.

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Definitions:

World Economy

An interconnected global system of economic activities, trade, and investment across countries.

Interconnected

Being linked or related in such a way that each element affects or is affected by others.

New Products

Items that have been recently introduced to the marketplace and offer new features, benefits, or improvements over previous versions.

Market Conditions

The characteristics and influences that affect the supply and demand for products and services in a particular market.