Question 6

Which of the following two statements is correct?

S1: As a result of their agency conflict with stockholders, creditors demand higher interest rates which results in lower agency costs for the firm.

S2: As a result of their agency conflict with stockholders, creditors demand more restrictive debt covenants that can prevent firms from making value-increasing investments which can result in an underinvestment problem.

Both statements are correct

Both statements are false

S2 is correct but S1 is false

S1 is correct but S2 if false

Question 3

Which of the following two statements is correct?

S1: Debtholders are particularly sensitive to the default risk of the firm because in case of bankruptcy they stand to lose a lot.

S2: Debtholders have no upside potential for their returns when the firm does well. In contrast, stockholders strongly benefit from the upside potential but can theoretically loose an infinite amount of money.

S2 is correct but S1 is false

S1 is correct but S2 if false

Both statements are false

Both statements are correct