This is a situation that arises when a firm's equity is close to worthless, and equityholders will prefer to not invest in safe projects.

Question

Quizplus · Accepted Answer

The situation described in the question is known as the underinvestment problem, where equityholders are hesitant to invest in safe projects because the potential returns are not high enough to justify the investment. This occurs when a firm's equity value is low, leaving the equityholders with little incentive to invest additional funds. As a result, the firm may miss out on profitable investment opportunities and may be unable to grow and prosper in the long run.

This Is a Situation That Arises When a Firm's Equity