Debt can be used to constrain managers because it: Provides additional cash flow

Question

Debt can be used to constrain managers because it:

Provides additional cash flow for their use.

Precommits a firm's excess cash flow to debt servicing.

Allows the management to issue more shares.

Eliminates a CEO's tendency to acquire other firms without a sound economic rationale.

Makes a CEO more likely to accept positive NPV projects.

Provides additional cash flow for their use.

Precommits a firm's excess cash flow to debt servicing.

Allows the management to issue more shares.

Eliminates a CEO's tendency to acquire other firms without a sound economic rationale.

Makes a CEO more likely to accept positive NPV projects.

Explanation / Answer

Debt can be used to constrain managers because debt results in fixed amount of interest to be paid from the excess cash flow. Due to the debt servicing , the available free cash flow becomes lower. Therefore the comptition for the best use of available cash after debt servicing becomes intense. Managers need to put the best efforts to get allocation for their projects or their budget is constrained to ensure availability of fund for debt servicing.

Therefore option 2 that mentions Debt can be used to constrain managers because it precommits a firm's excess cash flow to debt servicing is correct

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.