One of the Indirect Costs of Bankruptcy Is the Incentive

question 14

Multiple Choice

One of the indirect costs of bankruptcy is the incentive for managers to take large risks. When following this strategy:

• A) the firm will rank all projects and take the project which results in the highest expected value of the firm.
• B) bondholders expropriate value from stockholders by selecting high risk projects.
• C) stockholders expropriate value from bondholders by selecting high risk projects.
• D) the firm will always take the low risk project.
• E) Both the firm will rank all projects and take the project which results in the highest expected value of the firm; and bondholders expropriate value from stockholders by selecting high risk projects.

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Definitions:

High

A term which can refer to an elevated status, level, or degree of something, often used in a comparative context.

Categorical

Pertaining to data that can be divided into specific groups or categories that are qualitatively distinct.

Tossing

The act of throwing something lightly or casually, often used in the context of flipping a coin or similar objects.

Coin

A piece of hard material, typically metal, used as money, bearing an official stamp or design.