Use the following statements to answer this question:
A) I and II are correct.
B) I and II are incorrect.
C) I is correct and II is incorrect.
D) I is incorrect and II is correct.
I.Increasing a firm's debt can decrease the agency costs faced by shareholders.
II.Agency costs affect only shareholders.

Question

Quizplus · Accepted Answer

I is correct because increasing debt can lead to more monitoring by creditors which can limit the moral hazard risk, thereby reducing agency costs. II is incorrect because agency costs affect both shareholders and debtholders, as they both have conflicting interests and agency problems can arise between them as well.

Use the Following Statements to Answer This Question