One of the indirect costs to bankruptcy is the incentive toward underinvestment.Following this strategy may result in:
A)the firm always choosing projects with the positive NPVs.
B)the firm turning down positive NPV projects that it would clearly accept in an all equity firm.
C)stockholders contributing the full amount of the investment, but both stockholders and bondholders sharing in the benefits of the project.
D)Both A and C.
E)Both B and C.

Question

Quizplus · Accepted Answer

Underinvesting may result in the firm turning down positive NPV projects that it would clearly accept in an all equity firm. As a result, stockholders may contribute the full amount of the investment, but both stockholders and bondholders may end up sharing in the benefits of the project.

One of the Indirect Costs to Bankruptcy Is the Incentive