Which of the following statements is FALSE?
A) By including more covenants, issuers increase their costs of borrowing.
B) Once bonds are issued, equity holders have an incentive to increase dividends at the expense of debt holders.
C) Covenants may restrict the level of further indebtedness and specify that the issuer must maintain a minimum amount of working capital.
D) If the covenants are designed to reduce agency costs by restricting management's ability to take negative-NPV actions that exploit debt holders, then the reduction in the firm's borrowing cost can more than outweigh the cost of the loss of flexibility associated with covenants.
Answer: A
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What will be an ideal response?
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