Which of the Following Statements Is CORRECT

question 55

Multiple Choice

Which of the following statements is CORRECT?

• A) Because bankruptcy requires that corporate bondholders be paid in full before stockholders receive anything,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 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:

Mischel

A psychologist known for his work on personality theory and cognitive-affective systems, suggesting that behavior is influenced more by situational factors than by innate traits.

Nomothetic Goals

Refers to the objectives or aims that can be applied universally, emphasizing general laws and traits that can be studied across individuals.

Achievement

Accomplishment or success obtained by effort or skill.