Equity holders have an incentive to ________ the volatility of a firm's assets because they benefit from such an increase at a cost to ________.
A)decrease,debt holders
B)decrease,suppliers
C)increase,directors
D)increase,debt holders
E)increase,suppliers

Question

Quizplus · Accepted Answer

Equity holders benefit from an increase in the volatility of a firm's assets because it increases the potential return on their investment. However, this comes at a cost to debt holders as they are exposed to higher risk in the event of default. Therefore, the best choice is D where equity holders have an incentive to increase the volatility of a firm's assets and debt holders are the ones who bear the cost.

Equity Holders Have an Incentive to ________ the Volatility of a Firm's