When Shareholders Pursue Selfish Strategies Such as Taking Large Risks

question 10

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:

Uncollectible Receivables

Debts owed to a company that are considered to be uncollectable, indicating that the company does not expect to receive payment due to the debtor's inability to pay.

Percentage of Sales

A financial ratio that compares a particular expense or cost to the total sales revenue, often used to analyze cost behavior or performance.

Note Duration

The total length of time until a note payable or receivable matures and is to be repaid or collected.

Rate of Interest

The percentage of principal charged by the lender for the use of its money.