When Shareholders Pursue Strategies Such as Taking Excessive Risks or Paying

question 4

Multiple Choice

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

• A)no action by debtholders since these are equityholder concerns.
• B)positive agency costs, as bondholders act on various restrictions and covenants, which will diminish firm value.
• C)investments of the same risk class that the firm is in.
• D)no action by debtholders since these are equityholder concerns and investments of the same risk class that the firm is in.

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Definitions:

Quantity Decrease

A reduction in the amount or number of a particular good or service that is available or being produced.

Efficiency Losses

The reduction in economic efficiency due to imbalances or distortions in the market, often manifesting as excess or insufficient production and consumption.

Output Level

The quantity of goods or services produced by a firm or economy in a given period.

External Benefits

Positive effects of a product or service that are enjoyed by people other than those who directly use or consume the product or service.