Can someone help me with this multiple choice question and please briefly explai
ID: 2633436 • Letter: C
Question
Can someone help me with this multiple choice question and please briefly explain the correct answer.
One of the indirect costs to bankruptcy is the incentive toward underinvestment. Following this strategy may result in:
A. the firm always choosing projects with the positive NPVs.
B. the firm turning down positive NPV projects that it would clearly accept in an all equity firm.
C. stockholders contributing the full amount of the investment, but both stockholders and bondholders sharing in the benefits of the project.
D. Both the firm always choosing projects with the positive NPVs; and stockholders contributing the full amount of the investment, but both stockholders and bondholders sharing in the benefits of the project.
E. Both the firm turning down positive NPV projects that it would clearly accept in an all equity firm; and stockholders contributing the full amount of the investment, but both stockholders and bondholders sharing in the benefits of the project.
Explanation / Answer
B. the firm turning down positive NPV projects that it would clearly accept in an all equity firm