The Under-Investment Problem Refers to the Problem That Equity Holders

question 45

Multiple Choice

The under-investment problem refers to the problem that equity holders prefer not to invest in positive-NPV projects in highly levered firms because

• A)gains are evenly shared between all stakeholders.
• B)most of the gains from the investment accrue to debt holders.
• C)future investments are contingent on debt financing.
• D)projects are contingent on equity financing.

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