Which of the Following Is True of the Asset Substitution

question 19

Multiple Choice

Which of the following is true of the asset substitution problem?

• A)Debt provides an incentive for firms to take on unnecessary risk,substituting riskier investment projects for less risky projects.
• B)Equity holders may want to keep a firm operating when its liquidation value exceeds its operating value.
• C)Equity provides an incentive for firms to take on unnecessary risk investing in projects with a negative NPV.
• D)Equity holders have a tendency to take on only riskless projects,even when they have negative NPV.

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Definitions:

Silk

A natural protein fiber, obtained from the cocoons of silkworms, used in the textile industry for making luxurious fabrics.

Trade

The act of buying, selling, or exchanging goods and services between parties within or across national borders.

Coffee

Coffee is a popular beverage made by brewing roasted and ground beans of the Coffea plant, famed for its stimulating effect due to caffeine content.

Exports

Commodities or services sent overseas from one country to another aimed at commerce or trade.