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11. The cost of​ ________ is highest for firms that can easily increase the risk of...

11. The cost of​ ________ is highest for firms that can easily increase the risk of their investments. A. debt covenants B. asset substitution C. debt overhang D. debt maturity

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Answer #1

The cost of​ ________ is highest for firms that can easily increase the risk of their investments.

Ans: B. asset substitution

Explanation:

A. debt covenants : A covenant is a promise in any debt agreement, that certain activities will or will not be carried out. So, there is no cost for that. it is an terms and condition only.

C. debt overhang: It is a situation where company is overburden by debt and can not take additional debt

D. debt maturity: Debt to maturity is a period until debt will be redeemed. So, this cost is yield to maturity. But, Yield to maturity does not have that much role in investment risk of the company.

And the right answer is B. Cost of substitution. While restructuring the capital structure of the company there is certain cost that incurred for that. The highest substitution cost lead to highest WACC. and that is the investment risk for the company.

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