Question
Planning to issue new corporate bonds to fund production of clean energy Bond holder may object to this because if the new bonds are ranked
Planning to issue new corporate bonds to fund production of clean energy | Bond holder may object to this because if the new bonds are ranked higher than the existing bonds (claim dilution) |
Planning to pay dividends to shareholders | Bond holder may object because paying dividend decreases the companys cash position (assets) of the firm and increases the riskiness of its debt since firm may not be able to afford periodic interest payment. |
Planning to invest in production of industrial rubber that has very low success rate | Bond holders may object to this because when a firm use debt then there is a tendency to invest in risky projects. If risky investments prove successful, most of the benefits will flow to shareholders, but if it fails, most of the costs will be borne by lenders. This is the problem of asset substitution since managers may substitute safe assets (debt) with risky assets (by taking on risky projects). |
Rejecting projects related to production of electric cars because the NPV of the projects are very low. | Bond holders may object to this because managers may forgo valuable investment opportunities with low NPV because debt holders would get a portion of the benefits of the project, leaving insufficient returns to shareholders (problem of underinvestment) |
Can you please provide an explanation on each of these concepts please
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