Which of the Following Statements Is an Example of the Agency

question 18

Multiple Choice

Which of the following statements is an example of the agency cost of debt?

• A) ABC Co. 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 Co. has no debt but very few investment opportunities. The board of directors decides not to pay out a large special dividend. Lenders collect 100 percent of the face value of the debt.
• C) ABC Co. is financially sound. The company has a negative-NPV investment opportunity. Investors refuse to invest the additional funds necessary to pursue the project, as it has negative NPV.
• D) Investors are unsure of the value for ABC Co. ABC Co. decides to issue equity to pay down debt. The market assumes that ABC Co.'s managers are issuing equity because they think that the company's stock is overvalued. As a result, the company's stock price falls when the equity issue is announced.

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Definitions:

Psychosocial Developmental

The process of psychological and social growth that occurs over a person's lifetime, influenced by individual, social, and cultural factors.

Delay Gratification

The ability to resist the temptation for an immediate reward and wait for a later reward.

Animism

The belief that objects, places, and creatures all possess a distinct spiritual essence or soul.

Sibling Rivalry

The competition or animosity between siblings, which can involve jealousy, competition, and fighting.