State and explain any four actions or transactions management and shareholders that could be harmful to the interests of debt holders (sources of conflict).

CPA-Financial-Management-Section-3 Revision kit

i)Borrowing additional debt capital which take priority charge in case of liquidation.

(ii) Disposal of assets used as collateral for loans

(iii) Payment of high dividends which reduce the cash for investment.

(iv) Asset substitution
If a firm sells bonds for the stated purposes of engaging in low variance projects, the value of the shareholders equity rises and the value of bondholders claim is reduced substituting projects which increase the time variance rate.

(v) Under investment
A firm with outstanding bonds can have incentive to reject projects which have a positive NPV if the benefit form accepting the project accrues to the bondholders.

Inadequate disclosure
Sale of assets used to secure creditors

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