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Which of the followings about additional leverage (additional debt) and the agency costs is most correct?
A) It increases agency costs because managers are less likely to take risky projects even though they are positive NPV projects.
B) It increases agency costs because managers have less free cash flows to waste due to increased fixed interest payment obligations.
C) It decreases agency costs because managers become too risk-averse, causing under-investment for the firm.
D) It increases agency costs because managers are more likely take negative NPV projects.
2. Financial risk refers to the extra risk stockholders bear as a result of the use of debt instead of all equity.
True
False
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