When a Stockholder's Stake Is Worthless the Firm Runs the Risk

question 47

Multiple Choice

When a stockholder's stake is worthless the firm runs the risk of:

• A) underinvestment because there isn't much capital for investment.
• B) overinvestment because there isn't much wealth at risk.
• C) having bondholders invoke the separation principle to obtain first rights on the firm's assets.
• D) none of the options.

---

Definitions:

1970s

A decade marked by significant events including economic turmoil, the oil crisis, social movements, and the Cold War's continuing tension.

Price Expectations

The beliefs or forecasts that consumers and producers have regarding future prices, which can influence their economic decisions.

Long-run Phillips Curve

A concept suggesting that in the long term, there is no trade-off between inflation and unemployment, implying that efforts to reduce unemployment will not lead to higher inflation in the long run.

Long-run Phillips Curve

A graphical representation suggesting that in the long run, there is no trade-off between inflation and unemployment.