Which of the Following Statements About Asset Substitution Is Incorrect

question 6

Multiple Choice

Which of the following statements about asset substitution is incorrect:

• A) Managers have incentives to use debt finance to invest in higher-risk assets.
• B) When managers invest in higher-risk projects, lenders would share higher returns earned from the projects.
• C) The problem of asset substitution can be reduced by having a debt covenant that restricts investment opportunities of the entity.
• D) Asset substitution increased the risk borne by lenders.

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Definitions:

Communication

The process of exchanging information, ideas, or feelings between people through speaking, writing, or using some other medium.

Guarded

Involving careful and cautious behavior or actions.

Addressing Ambivalence

The act of recognizing and dealing with mixed feelings or contradictory attitudes towards a decision or change.

Overt and Covert Messages

Direct and openly communicated messages (overt) versus hidden or subtly delivered messages (covert).