In an Agency Problem Known as Debt Overhang,if the Company

question 44

Multiple Choice

In an agency problem known as debt overhang,if the company has risky debt outstanding,equity holders will choose to invest only if:

• A)the NPV of the project exceeds a cutoff equal to the relative riskiness of the firm's debt times its debt-equity ratio.
• B)the profitability index of the project exceeds a cutoff equal to the relative riskiness of the firm's debt times its debt-equity ratio.
• C)the NPV of the project is negative.
• D)the debt holders will lose all their money.

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