A situation that arises when a firm's equity is close to worthless,and equity holders will prefer to invest in overly risky projects with a small chance of success rather than simply paying debt holders their regularly schedule payments is referred to as:

Question

Quizplus · Accepted Answer

The situation described is known as the overinvestment problem, which refers to a scenario where a company's equity value is so low that equity holders have little to lose by investing in highly risky projects with low chances of success, rather than paying down their debts. This problem arises because equity holders have incentives that are not aligned with the long-term sustainability of the firm, which could lead to further losses and potential bankruptcy. The other answer choices are not applicable to this situation.

A Situation That Arises When a Firm's Equity Is Close