• Managers tend to take very risky decisions using debt holders money to finance company projects with a belief that the benefits of their decisions will accrue to shareholders the projects fails, and the company fails, debt holders may suffer a great loss than equity
• Managers may pay considerable sums of money as dividends hence jeopardizing the company’s future ability to maintain its liquidity. The amount advanced by the debt holders may be at risk.
• Shareholders and managers may wish to prolong the company’s life as long as possible whereas the debt holders may wish to safeguard the amount loaned and realize their security as soon as the company appears to be getting into financial difficulties.
• Managers may try to undermine the position of debt holders by seeking further loan capital committing the company to an increased interest burden and hence greater financial risk of insolvency.
Kavungya answered the question on March 30, 2022 at 07:03
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Additional information:
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Additional Information
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Date posted: December 15, 2021. Answers (1)