ICAB PL Financial Management Practice Questions - ICAB CA Professional Level Financial Management (Bangladesh) Exam

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How do debt holders (lenders) typically protect themselves against the risk-shifting (asset substitution) problem where managers undertake excessively risky projects that transfer wealth from debt holders to equity holders?

By imposing restrictive loan covenants regarding debt-to-equity ratios, dividend restrictions, and asset disposal limitations By demanding voting shares with full board representation in the borrowing company By eliminating all interest charges and taking an equity profit share By requiring the company to minimize its working capital balances

Correct Answer:

By imposing restrictive loan covenants regarding debt-to-equity ratios, dividend restrictions, and asset disposal limitations

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