Which of the Following Statements Is CORRECT

question 35

Multiple Choice

Which of the following statements is CORRECT?

• A) Since in bankruptcy they must be paid in full before stockholders receive anything, corporate bondholders generally prefer to see corporate managers invest in high risk/high return projects rather than low risk/low return projects.
• B) Since bondholders receive fixed payments, they do not share in the gains if risky projects turn out to be highly successful. However, they do share in the losses if risky projects fail and drive the firm into bankruptcy. Therefore, bondholders generally prefer to see corporate managers invest in low risk/low return projects rather than high risk/high return projects.
• C) One advantage of operating a business as a corporation is that stockholders can deduct their pro rata share of the taxes the firm pays, thereby eliminating the double taxation investors would face in a partnership.
• D) One drawback of forming a corporation is that you lose the limited liability that you would otherwise receive as a sole proprietor.
• E) Potential conflicts between stockholders and bondholders are increased if a firm's bonds are convertible into its common stock.

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Definitions:

Other-Race Effect

An inclination to more effortlessly discern faces of the race one is predominantly exposed to, generally one's own race.

Hindsight Bias

The tendency to believe, after an event has occurred, that one would have predicted or expected the outcome, often referred to as the "I-knew-it-all-along" effect.

Scapegoat Theory

A social psychology concept suggesting that individuals or groups often blame someone else for their own problems, leading to feelings of prejudice against that person or group.

Just-World Phenomenon

The cognitive bias to believe that the world is fair and people get what they deserve.