Which of the Following Statements Is FALSE

question 36

Multiple Choice

Which of the following statements is FALSE?

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

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Definitions:

Liabilities

A company's financial debts or obligations that arise during the course of business operations, required to be settled over time through the transfer of economic benefits.

Creditors

Individuals or entities to whom a company owes money or has financial obligations, typically arising from purchase of goods or services on credit.

Accounts Payable

A liability account tracking money owed by a business to suppliers or creditors for goods and services received.

Revenue Account

An account that records sales, services, or other income earned by a business.