Issuing debt instead of new equity in a closely held firm more likely causes owner-managers to
A)work harder than they would if equity had been issued.
B)consume more perquisites because the cost is passed on to the debtholders.
C)enjoy more leisure time than they would with an equity issue.
D)accept more unprofitable projects.
E)shirk their duties as they have less capital at risk.

Question

Quizplus · Accepted Answer

Issuing debt creates a fixed obligation that must be met, which can incentivize owner-managers to work harder to ensure the firm generates enough cash flow to meet these obligations, as opposed to issuing equity which does not have such fixed obligations.

Issuing Debt Instead of New Equity in a Closely Held