When Shareholders Pursue Selfish Strategies Such as Taking Large Risks

question 61

Multiple Choice

When shareholders pursue selfish strategies such as taking large risks or paying excessive dividends, these will result in:

• A)no action by debtholders since these are equity holder concerns.
• B)positive agency costs, as bondholders impose various restrictions and covenants which will
• Diminish firm value.
• C)investments of the same risk class that the firm is in.
• D)undertaking scale enhancing projects.
• E)lower agency costs, as shareholders have more control over the firm's assets.

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Definitions:

Value Increase

Refers to the rise in worth or price of assets, investments, or goods over time.

Black-Scholes

A mathematical model of a financial market containing derivative investment instruments, primarily used for pricing European call and put options.

European Options

Financial derivatives that give the holder the right, but not the obligation, to buy or sell an asset at a specified price on a specified expiration date, unlike American options, which can be exercised at any time before expiry.

Pricing Model

A method or algorithm used to determine the selling price of a product or service, taking into account costs, market conditions, and profit margins.