Shareholders in a leveraged firm might wish to accept a negative net present value project if:
A) it increases the standard deviation of the returns on the firm's assets.
B) it lowers the variance of the returns on the firm's assets.
C) it lowers the risk level of the firm.
D) it diversifies the cash flows of the firm.
E) it decreases the risk that a firm will default on its debt.

Question

Quizplus · Accepted Answer

Shareholders in a leveraged firm might accept a negative NPV project if it increases the standard deviation of returns, as this can increase the value of their equity by shifting more risk to debt holders.

Shareholders in a Leveraged Firm Might Wish to Accept a Negative