A(n) ________ in the volatility of assets of the firm benefits ________ at a cost to debt holders.
A) decrease, equity holders
B) increase, equity holders
C) decrease, directors
D) increase, directors

Question

Quizplus · Accepted Answer

An increase in volatility of assets benefits equity holders as it increases the chances of a high return on investment. However, this comes at a cost to debt holders as it increases the probability of default, resulting in reduced value or loss to debt holders. A decrease in volatility of assets benefits debt holders by reducing the risk of default, but it may limit the potential returns to equity holders. Choice A is incorrect as a decrease in volatility benefits debt holders, not equity holders. Choice C and D are incorrect as directors are not directly impacted by the volatility of assets.

A(n) ________ in the Volatility of Assets of the Firm