When a firm issues debt instead of equity to finance a new project,
A)bondholders take on additional voting control as a result of their ownership of the debt instruments.
B)shareholders share voting rights with bondholders.
C)shareholders maintain voting control of the company but may face additional restrictive covenants found in the bond indenture.
D)shareholders generally retain their rights to dividends owed before they are responsible for making newly contracted interest payments to bondholders.

Question

Quizplus · Accepted Answer

When a firm issues debt instead of equity, the shareholders maintain their voting control of the company. However, the bond indenture may contain restrictive covenants that place limitations on the company's actions. Additionally, the dividends owed to shareholders may be affected as the company is required to make interest payments to bondholders before paying dividends. Bondholders do not have voting rights in the company.

When a Firm Issues Debt Instead of Equity to Finance