The Under-Investment Problem Refers to the Problem That Equity Holders

question 4

Multiple Choice

The under-investment problem refers to the problem that equity holders prefer not to invest in positive-NPV projects in highly levered firms because

• A) future investments are contingent on debt financing.
• B) most of the gains from the investment accrue to debt holders.
• C) projects are contingent on equity financing.
• D) gains are evenly shared between all stakeholders.

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Definitions:

Accounts Receivable

Financial dues owed by patrons to an enterprise for products or services consumed but not yet compensated.

Asset

A resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide future benefit.

Liability

Obligations or debts that a company owes to others, which must be settled over time through the transfer of assets, provision of services, or other value.

Collection

The process of pursuing payments of debts owed by customers.