Which of the following statements is an example of an agency cost of debt?

Question

Quizplus · Accepted Answer

Agency costs of debt occur when the interests of shareholders and debt holders diverge, particularly when shareholders take actions that increase their returns at the expense of debt holders. In choice A, shareholders encourage management to pursue highly risky projects because the company is highly leveraged, which means debt holders bear most of the risk while shareholders could gain significantly if the projects succeed. This situation exemplifies an agency cost of debt, as it potentially harms the interests of the debt holders for the benefit of shareholders.

Which of the Following Statements Is an Example of an Agency