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.

---

Definitions:

Psychoticism

A personality trait marked by aggressiveness, impulsivity, and a lack of empathy, often associated with risk for psychotic disorders.

Schizotypal Personality Disorder

An emotional disorder characterized by profound social phobia, cognitive disarray, feelings of persecution, dissociation from reality, episodic psychosis, and typically unorthodox beliefs.

African Americans

A term referring to citizens or residents of the United States who have full or partial ancestry from any of the black racial groups of Africa.

European Americans

Individuals in the United States who are of European descent, forming a significant demographic group within the country's population.