Which of the following statements is true?

Question

Quizplus · Accepted Answer

Bond covenants can be designed in a way that benefits both bondholders and shareholders, and helps to maximize firm value. By imposing certain restrictions on the firm's financial decisions, bondholders are protected from risks that could lower the value of their investment. At the same time, these restrictions can help to enhance the creditworthiness of the firm and its ability to raise capital at favorable terms, which in turn benefits shareholders. Therefore, bond covenants can serve to align the interests of both bondholders and shareholders in the pursuit of maximizing firm value. Bond covenants can serve to protect bondholders by limiting the firm's ability to take on risky investments or pay out dividends, but they can also benefit shareholders by increasing the likelihood of the firm being able to fulfill its obligations to bondholders and maintain a good credit rating. If the firm's credit rating improves, it can raise capital at lower costs, benefiting both bondholders and shareholders. Therefore, bond covenants can serve to maximize firm value, which means shareholder value is also maximized.

Which of the Following Statements Is True