Which one of the following statements is TRUE?
A) A corporate golf club membership is an example of a nonpecuniary benefit
B) Firms borrowing money have greater flexibility to use that money when there are debt covenants.
C) When lenders protect themselves from the risk of asset switching by raising the interest rate, the firm's WACC can decrease.
D) A lender calling in a corporate loan and then lending the funds out to a safer borrower is an example of asset switching.
E) A supplier substituting a lower-quality raw material without approval is an example of asset switching.

Question

Quizplus · Accepted Answer

A corporate golf club membership is a nonpecuniary benefit because it is a perk that does not involve direct monetary compensation. Option B is incorrect because debt covenants limit a firm's flexibility as they impose restrictions on how the borrowed funds can be used. Option C is incorrect because raising the interest rate does not decrease the firm's WACC. Option D is incorrect because asset switching refers to a borrower switching assets, not a lender. Option E is incorrect because substituting a lower-quality raw material is not an example of asset switching.

Which One of the Following Statements Is TRUE