Issuing Debt Instead of New Equity in a Closely Held

Multiple Choice

Issuing debt instead of new equity in a closely held firm more likely:

A) causes the owner-manager to work less hard and shirk their duties as they have less capital
At risk.
B) causes the owner-manager to consume more perquisites because the cost is passed to the
Debtholders.
C) causes both more shirking and perquisite consumption since the government provides a tax
Shield on debt.
D) causes agency costs to fall as owner-managers do not need to worry about other
Shareholders.
E) causes the owner-manager to reduce shirking and perquisite consumption as the excess
Cash flow must be used to meet debt payments.