Which one of the following statements is TRUE?
A) Lenders will protect themselves from asset switching by charging a higher interest rate.
B) Creditors have a claim on a firm's earning stream through the dividend payments they receive.
C) An example of asset switching is an option to exchange one piece of real estate for another.
D) Lenders can't legally prevent a firm from engaging in asset switching.
E) Firms borrowing money have greater flexibility to use that money when there are debt covenants.

Question

Quizplus · Accepted Answer

Lenders protect themselves from asset switching by charging a higher interest rate to compensate for the increased risk that the borrower might engage in asset switching, which could jeopardize the lender's security.

Which One of the Following Statements Is TRUE