Creditors and Shareholders May Have an Incentive Incompatibility Because

question 10

Multiple Choice

Creditors and shareholders may have an incentive incompatibility because:

• A) shareholders can declare bankruptcy and hence have limited liability.
• B) creditors must bear less risk than shareholders.
• C) creditors can call debt if better opportunities arise.
• D) shareholders choose projects with less risk than creditors would like.
• E) none of the above; creditors and shareholders are both interested in maximizing the profits of the enterprise.

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Definitions:

Present Value

The present evaluation of a future cash sum or series of cash receipts, factoring in a certain rate of return for discounting.

Interest Rate

The sum a lender charges a borrower to use assets, conveyed as a percentage of the principal's amount.

Present Value

The here and now valuation of a prospective future financial amount or series of cash flows, calculated with a certain return rate.

Future Value

The value of an investment at a specified date in the future, taking into account factors like interest rates and compound interest.