A company issues bonds saying that it will use the proceeds for a safe investment. Instead, it uses the proceeds for a risky investment. Which of the following statements is true about this situation.
A. This will result in a decrease in the value of the debt because the company is riskier.
B. This will result in a decrease in the value of the equity because the company is riskier.
C. This will result in a lawsuit from the stockholders because it is bait and switch.
D. This will cause bondholders to convert their bonds to stock.
E. Dividends will go up to compensate shareholders for their increased risk.
Answer: A
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