Which of the Following Statements Is CORRECT

question 55

Multiple Choice

Which of the following statements is CORRECT?

• A) Because bankruptcy requires that corporate bondholders be paid in full before stockholders receive anything,bondholders generally prefer to see corporate managers invest in high risk/high return projects rather than low risk/low return projects.
• B) Since bondholders receive fixed payments,they do not share in the gains if risky projects turn out to be highly successful.However,they do share in the losses if risky projects fail and drive the firm into bankruptcy.Therefore,bondholders generally prefer to see corporate managers invest in low risk/low return projects rather than high risk/high return projects.
• C) One advantage of operating a business as a corporation is that stockholders can deduct their pro rata share of the taxes the firm pays,thereby eliminating the double taxation investors would face in a partnership.
• D) One drawback of forming a corporation is that you lose the limited liability that you would otherwise receive as a proprietor.
• E) Potential conflicts between stockholders and bondholders are increased if a firm's bonds are convertible into its common stock.

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Definitions:

Marginal Cost

The increase in cost that arises from producing one additional unit of a good or service.

Production Level

The quantity of goods or services that a company is capable of producing over a given period of time.

Marginal Costs

The amount spent on producing an extra unit of a product or service.

Fixed Costs

Costs that do not vary with the level of output or sales in the short term, such as rent or salaries.