Which of the Following Statements About Asset Substitution Is Incorrect

Multiple Choice

Which of the following statements about asset substitution is incorrect:

A) Managers have incentives to use debt finance to invest in higher-risk assets.
B) When managers invest in higher-risk projects, lenders would share higher returns earned from the projects.
C) The problem of asset substitution can be reduced by having a debt covenant that restricts investment opportunities of the entity.
D) Asset substitution increased the risk borne by lenders.