The problem of 'underinvestment' occurs when the entity faces financial difficulty and managers are reluctant to undertaken projects with positive net present value because:
A) managers prefer less risk than do lenders.
B) the projects lead to increased funds available to lenders rather than shareholders.
C) the projects would adversely affect managers' bonus payments.
D) managers prefer to maintain a greater level of funds within the entity.

Question

Quizplus · Accepted Answer

Underinvestment occurs when managers avoid projects that would benefit the company because the returns would primarily benefit lenders, not shareholders, reducing the incentive for managers to pursue them.

The Problem of 'Underinvestment' Occurs When the Entity Faces Financial