1.

Bonding costs

Group of answer choices

occur when security is offered for a loan

are incurrred by the principal to reduce agency costs

refer to a bondholders costs of monitoring debt

are incurred by the agent to reduce agency costs

2.

Chance-it Ltd issued 10-year unsecured bonds (debt instruments) and subsequently obtained a bank loan from Private Bank, which required a secured charge (mortgage) over Chance-it Ltd's real estate assets. This is an example of

Group of answer choices

asset substitution

claim dilution

the horizon problem

underinvestment

3.

Chance-it Ltd reduced its research and development expenditure to increase profit in the short-term, even though it would reduce profitability in the long-term. This is an example of:

Group of answer choices

the horizon problem

earnings management

underinvestment

the risk aversion problem

4.

According to agency theory, which of the following reasons explain why managers agree to leverage covenants in debt contracts?

I to avoid incurring higher cost of debt (interest cost)

II because managers interests are more aligned with the interests of debtholders than with the interests of shareholders

Group of answer choices

I only

II only

Neither I nor II is correct

Both I and II

5.

Accounting numbers can be used in management compensation contracts to

Group of answer choices

align the interests of managers with the interests of shareholders

all of the other answers are correct

determine how much incentive remuneration will be paid to the manager

specify performance targets (performance hurdles)

6.

Borrower Ltd has a debt covenant that requires it to maintain interest coverage of at least 3 times. According to agency theory, if Borrower Ltds actual interest coverage is close to 3 times, management would prefer:

Group of answer choices

Reclassifying interest paid as a financing activity in the statement of cash flows

Increasing the provision for warranty expenses

Upward revaluation of property, plant and equipment

Preference shares to be classified as equity instead of as liabilities