Asked by Alyssa Currie on Jul 09, 2024
Verified
The following statements about asset substitution are true except for:
A) Managers have incentives to use debt finance to invest in higher-risk assets with the expectation of obtaining higher returns for shareholders.
B) Lenders are willing to share higher returns earned when managers invest in higher-risk projects.
C) A debt covenant that restricts investment opportunities of the entity can reduce the entity's borrowing costs.
D) Asset substitution arises when an entity uses borrowed funds to invest in higher risk assets than those agreed upon in the debt contract.
Asset Substitution
A financial strategy where a firm replaces less risky assets with more risky investments, potentially increasing shareholders' wealth but also the risk to lenders.
Debt Covenant
Agreements between a borrower and lender stating specific limitations or conditions about the borrower's actions.
Borrowing Costs
Expenses incurred by an entity for borrowing funds, including interest, amortization of discounts or premiums on debt, and other related costs.
- Acquire knowledge on the core concepts of accounting theories, which include normative and positive theories along with their developmental stages.
Verified Answer
Learning Objectives
- Acquire knowledge on the core concepts of accounting theories, which include normative and positive theories along with their developmental stages.
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