Which One of These Statements Most Applies to a Firm

question 13

Multiple Choice

Which one of these statements most applies to a firm that is suffering from financial distress?

• A)Bondholders will desire high risk projects in order to protect their investment.
• B)Stockholders will increase their investment in the firm to protect their current investment.
• C)Stockholders will generally prefer low-risk over high-risk projects.
• D)Managers will tend to lower dividends in an effort to protect shareholder value.
• E)Stockholders will bear the cost of selfish investment strategies through higher interest payments.

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Definitions:

Unit of Production

A single complete item or a specified amount of a commodity produced.

Positive Externality

An economic situation where a third party benefits from a transaction or activity they are not directly involved in.

Negative Externality

A cost suffered by a third party due to an economic transaction or activity, without compensation, such as pollution from a factory affecting nearby residents.

Public Goods

Goods that are non-excludable and non-rivalrous, meaning that one person's consumption does not reduce the availability to others, and it's hard to prevent people from using them.