The Presence of a Large Amount of Debt Can Encourage

question 9

Multiple Choice

The presence of a large amount of debt can encourage shareholders to take excessive risk because ________.

• A) equity holders are risk seeking by nature
• B) the costs of failure are borne largely by debt holders
• C) debt holders are risk seeking
• D) firm value increases with risk taking

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Definitions:

Cognitive Dissonance

The mental discomfort experienced by a person who holds two or more contradictory beliefs, ideas, or values at the same time.

Bystander Apathy

A psychological phenomenon where individuals are less likely to offer help to a victim when other people are present, often due to the diffusion of responsibility.

Kitty Genovese

A woman whose 1964 murder in New York City led to research on the bystander effect and social psychology.

Kohlberg's Levels

Stages of moral development proposed by Lawrence Kohlberg, ranging from pre-conventional to conventional and post-conventional morality.