All things being equal,firms would typically prefer to disclose low levels of debt because:
A) Any debt is a bad thing in the capital structure of a business.
B) Additional debt may lead to a technical breach of a firm's contractual agreements with existing debt-holders and lead to the possible wind-up of the business or the need to renegotiate the contract.
C) The level of recognised debt will affect the profitability of the business.
D) Recognising debt in the income statement may lead to a decrease in management bonuses that are based on the times-interest-earned and debt-to-assets ratios.

Question

Quizplus · Accepted Answer

Disclosing high levels of debt may alert existing debt-holders of the possibility of default or bankruptcy. This may lead to a breach of the firm's contractual agreements with existing debt-holders and result in the possible wind-up of the business or the need to renegotiate the contract. Therefore, firms would typically prefer to disclose low levels of debt to avoid such complications.

All Things Being Equal,firms Would Typically Prefer to Disclose Low