If Alpha International Inc.has debt in its capital structure,it may forego a ________ project because too much of the increase in the firm's value may accrue to the creditors rather than the stockholders.

Question

Quizplus · Accepted Answer

A positive NPV project is expected to add value to the firm. However, if the firm has significant debt, the benefits of undertaking such a project may disproportionately accrue to the creditors rather than the equity holders, making the equity holders less inclined to pursue the project despite its positive NPV.