Compared to a firm with unlimited liability, the limited liability feature of common equity results in a
A)lower present value of the interest tax shield.
B)higher value to equityholders.
C)leveraged buyout mechanism.
D)higher value to debtholders.

Question

Quizplus · Accepted Answer

Limited liability reduces the risk for shareholders, making the investment more attractive and valuable to potential investors, thereby increasing the value of the equity. Limited liability does not directly affect the interest tax shield, leveraged buyout mechanism, or the value of debtholders.

Compared to a Firm with Unlimited Liability, the Limited Liability