Firm Y issued $100,000,000 of bonds last year for the purpose of building a new widget manufacturing plant.Firm Y instead used the proceeds to fund Blackjack gamblers in Las Vegas.Which of the following best describes the general problem that Y's investors must deal with?

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Quizplus · Accepted Answer

The general problem that Y's investors must deal with is the Asset Substitution Problem. This is because Y issued bonds to fund the building of a widget manufacturing plant, but instead used the proceeds to fund Blackjack gamblers in Las Vegas. This means that Y has substituted the intended asset with a riskier one, potentially affecting the value of the bonds and the investors' returns. The Underinvestment Problem refers to a situation where a firm may underinvest in a project, while the Overinvestment Problem refers to a situation where a firm may invest too much in a project. The Enron Problem refers to a specific case of corporate fraud and accounting scandals that led to the collapse of Enron Corporation.

Firm Y Issued $100,000,000 of Bonds Last Year for the Purpose