In a company, an agency problem may exist between management and shareholders on one hand and...
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In a company, an agency problem may exist between management and shareholders on one hand and the creditors on the other because management and shareholders, who own and control the company have the incentive to enter into transactions that may transfer wealth from creditors to shareholders, hence the need for agreements by creditors in lending contracts. Required: (i) Explain, citing relevant examples any four actions or transactions by management and shareholders that could be harmful to the interests of debt holders. (4 marks) (ii) Discuss four restrictive covenants that debt holders may use to protect their wealth from management and shareholder raids. (4 marks) In a company, an agency problem may exist between management and shareholders on one hand and the creditors on the other because management and shareholders, who own and control the company have the incentive to enter into transactions that may transfer wealth from creditors to shareholders, hence the need for agreements by creditors in lending contracts. Required: (i) Explain, citing relevant examples any four actions or transactions by management and shareholders that could be harmful to the interests of debt holders. (4 marks) (ii) Discuss four restrictive covenants that debt holders may use to protect their wealth from management and shareholder raids. (4 marks)
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Related Book For
Auditing A Practical Approach with Data Analytics
ISBN: 978-1119401742
1st edition
Authors: Raymond N. Johnson, Laura Davis Wiley, Robyn Moroney, Fiona Campbell, Jane Hamilton
Posted Date:
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