Shareholders in a leveraged ﬁrm might wish to accept a negative net present value project if:

Question

Quizplus · Accepted Answer

Shareholders in a leveraged firm might wish to accept a negative net present value project if it increases the standard deviation of the returns on the firm's assets. This is because in a leveraged firm, the cost of debt is usually lower than the cost of equity, so the firm can benefit from an increase in volatility if it leads to higher returns. The higher returns can then be used to service the debt, which ultimately benefits the shareholders.

Shareholders in a Leveraged ﬁRm Might Wish to Accept a Negative