Which one of the following statements is TRUE?
A) An example of asset switching is borrowing money to buy equipment but instead taking it to Las Vegas to gamble with it.
B) The commission required by the Federal Housing Agency for a small business loan is an example of an agency cost.
C) An example of an agency cost is the salary of the agent hired to work for the principal.
D) Creditors have a claim on a firm's earning stream through the dividend payments they receive.
E) An example of asset switching is an option to exchange one piece of real estate for another.

Question

Quizplus · Accepted Answer

Asset switching refers to the act of using borrowed funds for purposes other than those intended by the lender. In this case, borrowing money to buy equipment but instead using it to gamble in Las Vegas is a clear example of asset switching, as the funds are diverted from their intended use (purchasing equipment) to a completely different and riskier activity (gambling).

Which One of the Following Statements Is TRUE