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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Definitions:

Breach of Contract

The failure to perform any term of a contract, written or oral, without a legitimate legal excuse.

Implied Warranty

A legal assumption that a product will perform as expected according to the sale terms without being explicitly stated.

Agency Relationship

A fiduciary connection between two parties, where one (the agent) is authorized to act on behalf of the other (the principal) in dealings with third parties.

Occasion Photography

The professional service of capturing photos for specific events or occasions, such as weddings, birthdays, or corporate events.