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:

Mental Concentration

The ability to direct one's thinking in whatever direction one would intend, focusing mental efforts on a specific object, task, or subject.

Tenant Farmer

An agricultural worker who rents land to farm on, rather than owning it, often under conditions that can lead to long-term economic dependency.

Paternalism

A policy or practice of limiting the freedom or responsibilities of subordinates in their supposed interest, often justified by a belief in their incapacity to make decisions.

Crop Lien

A system of credit where farmers borrowed against the future earnings of their crops, leading to a cycle of debt and economic dependency, especially in the post-Civil War Southern United States.