Which one of the following statements is TRUE?
A. An agency problem occurs when an owner/manager sells stock to an outsider but continues to consume perquisites.
B. Firms borrowing money have greater flexibility to use that money when there are debt covenants.
C. When lenders protect themselves from the risk of asset switching by raising the interest rate, the firm's WACC can decrease.
D. A lender calling in a corporate loan and then lending the funds out to a safer borrower is an example of asset switching.
E. A supplier substituting a lower-quality raw material without approval is an example of asset switching.
Answer: A
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