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 stockholders and bondholders 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, and this makes it easier for corporations to raise
Capital.

Question

Quizplus · Accepted Answer

Stockholders have residual ownership interest in the company and are willing to take on more risk in the hope of higher returns, whereas bondholders have a fixed claim and want to minimize risk. Therefore, stockholders are generally more willing than bondholders to have managers invest in risky projects with high potential returns. Additionally, option A is incorrect because corporations offer limited liability to shareholders, while option B and E are incorrect due to their inaccuracies. Option C is also incorrect because bondholders would prefer safer projects with lower expected returns to ensure that they receive their fixed payments.

Which of the Following Statements Is CORRECT