Which one of the following statements is correct?
A) Mergers benefit shareholders but not creditors.
B) Positive NPV projects will automatically benefit both creditors and shareholders.
C) There may be conflicts between the interests of bondholders and shareholders.
D) Creditors prefer negative NPV projects while shareholders prefer positive NPV projects.
E) Mergers rarely affect bondholders.

Question

Quizplus · Accepted Answer

Bondholders and shareholders may have conflicting interests because bondholders have priority over shareholders in the event of bankruptcy or financial distress. Bondholders are more concerned with the firm's ability to make scheduled interest and principal payments, while shareholders are more interested in maximizing their returns through dividends and capital gains. As a result, decisions that benefit shareholders may come at the expense of bondholders.

Which One of the Following Statements Is Correct