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Answer the following. (a) Suppose a new bond issue includes a covenant prohibiting the use of special dividends. What agency conflict is this sort of restrictive covenant intended to solve? (b) Now suppose that firm performance is significantly higher than anticipated, so that equity free cash flow is very high. This abnormally good performance is not expected to continue. Assume the firm has no growth prospects. Explain why the firms managers would hesitate to raise their level of common dividend to distribute this extra cash. (c) If the cash is not distributed, what agency problem does this create?

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Financial Management, Finance

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