The Presence of a Large Amount of Debt Can Encourage

question 112

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.
• E)this will increase profits.

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Definitions:

Assets

Resources owned by a company or individual with economic value.

Bankruptcy Law

The area of law dealing with situations where individuals or entities cannot repay their debts and seek relief through legal proceedings.

Bankruptcy Abuse Prevention and Consumer Protection Act

A U.S. law enacted in 2005 aimed at curtailing bankruptcy filings considered abusive and providing better consumer protections.

Bankruptcy Code

The set of laws under the Title 11 of the United States Code that governs bankruptcy processes and proceedings in the United States.