Consider this decision tree,which represents the outcomes of two alternative projects that Ink,Inc.,a producer of printers,might pursue.Ink,Inc.,needs to borrow $1,000 to pursue either project and is going to sell bonds to finance the venture.
Under these circumstances,bondholders and shareholders may have incompatible incentives because:
A) shareholders know that they have limited liability because of their ability to declare bankruptcy.
B) bondholders are not profit maximizers.
C) shareholders are not profit maximizers.
D) bondholders have limited liability because insurance against risk is provided by the federal government.
E) shareholders insure bondholders against risk.

Question

Consider this decision tree,which represents the outcomes of two alternative projects that Ink,Inc.,a producer of printers,might pursue.Ink,Inc.,needs to borrow $1,000 to pursue either project and is going to sell bonds to finance the venture. 
Under these circumstances,bondholders and shareholders may have incompatible incentives because:
A) shareholders know that they have limited liability because of their ability to declare bankruptcy. 
B) bondholders are not profit maximizers. 
C) shareholders are not profit maximizers. 
D) bondholders have limited liability because insurance against risk is provided by the federal government. 
E) shareholders insure bondholders against risk.

Quizplus · Accepted Answer

The Answer of Consider this decision tree,which represents the outcomes of two alternative projects that Ink,Inc.,a producer of printers,might pursue.Ink,Inc.,needs to borrow $1,000 to pursue either project and is going to sell bonds to finance the venture. 
Under these circumstances,bondholders and shareholders may have incompatible incentives because:
A) shareholders know that they have limited liability because of their ability to declare bankruptcy. 
B) bondholders are not profit maximizers. 
C) shareholders are not profit maximizers. 
D) bondholders have limited liability because insurance against risk is provided by the federal government. 
E) shareholders insure bondholders against risk.

Consider This Decision Tree,which Represents the Outcomes of Two Alternative