Which of the following statements is CORRECT?
A) One disadvantage of operating as a corporation rather than as a partnership is that corporate shareholders are exposed to more personal liability than partners.
B) There is no good reason to expect a firm's bondholders and stockholders to react differently to the types of new asset investments a firm makes.
C) Bondholders are generally more willing than stockholders to have managers invest in risky projects with high potential returns as opposed to safer projects with lower expected returns.
D) Stockholders are generally more willing than bondholders to have managers invest in risky projects with high potential returns as opposed to safer projects with lower expected returns.
E) Relative to sole proprietorships, corporations generally face fewer regulations, which makes raising capital easier for corporations.

Question

Quizplus · Accepted Answer

Stockholders have a higher appetite for risk-taking as their investment is in the form of equity, which has higher potential returns but also higher risk. Bondholders, on the other hand, lend money to the firm and expect a fixed return, making them more risk-averse. Therefore, stockholders are generally more willing than bondholders to have managers invest in risky projects with high potential returns. Choice A is incorrect because in a corporation, shareholders have limited liability, whereas partners have unlimited liability. Choice B is incorrect because bondholders and stockholders have different interests and therefore may react differently to a firm's investment decisions. Choice C is incorrect because bondholders are more risk-averse and prefer safer projects. Choice E is incorrect because corporations generally face more regulations than sole proprietorships.

Which of the Following Statements Is CORRECT